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Measurement of market (industry) concentration based on value validity
1Department of Mechanical Engineering and Department of Industrial & Systems Engineering, University of Minnesota, Minneapolis, MN, United States of America.
Plos One
|July 18, 2022
Summary
A new market concentration index is introduced, addressing limitations of existing measures like the concentration ratio and Herfindahl-Hirschman index (HHI). This novel index offers improved value-validity for accurate industry concentration assessment.
Area of Science:
- Economics
- Industrial Organization
- Econometrics
Background:
- Existing market concentration indices, including the concentration ratio and Herfindahl-Hirschman index (HHI), lack the value-validity property.
- Accurate assessment of market concentration is crucial for understanding industry structure and competitive dynamics.
Purpose of the Study:
- To introduce a novel index for measuring market concentration that possesses value-validity.
- To enable accurate order and difference comparisons of market concentration attributes.
Main Methods:
- Development of a new value-valid index for market concentration.
- Analysis using computer simulation data and real-world market share data.
- Theoretical and functional relationship analysis with existing indices and market power measures.
Main Results:
- The new index demonstrates the desirable value-validity property, unlike the concentration ratio and HHI.
- The new index exhibits a close functional relationship with the Herfindahl-Hirschman index.
- A firm theoretical link was established between the new index and market power, as indicated by the price-cost margin.
Conclusions:
- The proposed index offers a more accurate and reliable method for assessing market concentration.
- The findings support modifications to existing merger guidelines based on the new index's properties.
- This advancement provides a superior tool for economic analysis of market structures.
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