The CR4 Index and the Interval Estimation of the Herfindahl-Hirschman Index: An Empirical Comparison

Abstract

Concentration indices are employed to measure the level of competition within an industry. Among the several indices proposed in the literature, the Herfindahl-Hirschman Index (HHI) and the Four-firm concentration ratio (CR4) are among the most established. However, the HHI requires the market shares of all market players to be known, while the CR4 requires just the top four. In order to investigate whether we can always use the CR4 in place of the HHI, we have compared the indices resulting from a selected group of datasets. This preliminary analysis shows that the relationship between the CR4 and the HHI may not be monotonic, so that the CR4 does not preserve the order relationship established through the HHI.

Keywords: Concentration indices, Competition, Herfindahl-Hirschman Index (HHI), Four-firm concentration ratio

JEL Classification: L11, L22, L40, D4