Lesson 8 of 9 · All lessons in this module
- Revenue, economic profit and the MR = MC ruleVideo lesson
- Breakeven, shutdown and exit decisionsVideo lesson
- Short-run and long-run costs: economies and diseconomies of scale
- The four market structures and what defines them
- Monopolistic competition: price, output and the long run
- Oligopoly: kinked demand, Cournot, Stackelberg and price leadershipVideo lesson
- Oligopoly strategy: Nash equilibrium, collusion and the long runVideo lesson
- Identifying market structure: elasticity, concentration ratios and HHI
- Integrated cases: reading a market from the data
Lesson 8 of 9 · 11 min
Identifying market structure: elasticity, concentration ratios and HHI
Market power is best judged by estimating demand elasticity, but because that is hard, analysts and regulators use the concentration ratio and the Herfindahl-Hirschman index, both of which ignore the threat of entry.
In short
- Market power lets firms restrict output and raise prices, so competition (antitrust) law limits it; analysts should consider whether regulators may block a merger.
- In theory, measure power through elasticity: very elastic demand suggests near-perfect competition. Estimation is hard (endogeneity, data needs, structural change).
- N-firm concentration ratio: sum of the market shares of the largest N firms. Simple, but barely reacts to mergers among the top firms and ignores entry.
- HHI: sum of the squared market shares of the top N firms. It reacts more strongly to mergers; 1/HHI is the equivalent number of equal-sized firms.
- Neither measure accounts for the threat of entry or the elasticity of demand.
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