Answer: is less affected by mergers among the top market incumbents.

## Explanation The correct answer is C: "is less affected by mergers among the top market incumbents." ### Key Differences Between Concentration Ratio and HHI: 1. **Concentration Ratio (CRn)**: - Measures the combined market share of the top 'n' firms in an industry - Typically uses CR4 (top 4 firms) or CR8 (top 8 firms) - **Less sensitive to mergers among top firms** because it only considers the combined market share of the top firms - Does not account for the distribution of market shares among the top firms 2. **Herfindahl-Hirschman Index (HHI)**: - Calculated as the sum of squares of market shares of all firms in the industry - Formula: HHI = Σ(s_i²) where s_i is the market share of firm i (expressed as a percentage) - **More sensitive to mergers among top firms** because squaring gives more weight to larger firms - Accounts for the distribution of market shares across all firms ### Why Option C is Correct: - When two large firms merge, the HHI increases significantly because the squared market share of the merged entity is much larger than the sum of their individual squared market shares - The concentration ratio would show a smaller change because it simply adds the market shares of the merging firms ### Why Other Options are Incorrect: - **Option A**: Neither HHI nor concentration ratio directly considers elasticity of demand. Both are structural measures of market concentration. - **Option B**: Neither measure accounts for the possibility of new entrants. Both are static measures of current market structure. ### Example: Suppose an industry has 4 firms with market shares: 40%, 30%, 20%, 10% - CR4 = 100% (40+30+20+10) - HHI = 40² + 30² + 20² + 10² = 1600 + 900 + 400 + 100 = 3000 If the top two firms merge (40% + 30% = 70%): - CR4 = 70% + 20% + 10% = 100% (no change in CR4) - HHI = 70² + 20² + 10² = 4900 + 400 + 100 = 5400 (significant increase from 3000) This demonstrates that HHI is more affected by mergers among top firms than the concentration ratio.

Author: LeetQuiz .