This analysis can take place after the fact — that is, after Concentration ratio oligopoly or monopoly already exists — but more commonly, the evaluation takes place before the market is thrown out of balance.
The HHI has a fair amount of correlation to the concentration ratio and may be a better measure of market concentration. By measuring the combined market shares of the top four companies in a specific industry or market, we can tell whether an improper imbalance in market competition exists or may be created by company mergers.
The Herfindahl-Hirschman Index is calculated by taking the sum of the squares of the market shares of every firm in the industry. Another tool, the Herfindahl Index, can illuminate the bigger picture by providing another benchmark for comparison purposes. Understanding Concentration Ratio The concentration ratio indicates whether an industry is comprised of a few large firms or many small firms.
If there are other competitors, they are vastly outperformed by the dominant company. For example, a ratio of 40 percent or less means that no single company or group of companies dominates that market. The same could be calculated for more or less than four of the top companies in the industry.
It is zero when the market share held by top four firms is negligible. These smaller firms may also compete only in a limited way with the dominant firms.
An HHI of less than represents a relatively unconcentrated market, and the DOJ likely would not challenge a merger that would leave the industry with an HHI in that range.
Therefore, the ratio indicates that the biotech industry is an oligopoly.
Similar to the four-firm concentration ratio, the eight-firm concentration ratio is calculated for the market share of the eight largest firms in an industry.