SPECIAL ARTICLE

Concentration vs Inequality Measures

of Market Structure
An Exploration of Indian Manufacturing
Pulak Mishra, Ujjwal Singh Rao

This paper compares market structure in different

industries using conventional additive measures and
various indices of firm size inequality. It is found that
levels or changes in market structure are not exactly
consistent across various measures. However, as
compared to additive measures, inequality indices give
more consistent results, and hence can be used to
examine the structure of markets in different industries.
Nonetheless, since there are inconsistencies across
different inequality indices, efforts should be made
towards formulating a suitable criterion for selecting the
most appropriate measure.

The authors are grateful to Rakesh Basant for having useful discussions
at the early stage of writing this paper. The authors are also thankful to
an anonymous referee of this journal for valuable comments and
suggestions. Usual disclaimers apply.
Pulak Mishra (pmishra@hss.iitkgp.ernet.in) is with the Department of
Humanities and Social Sciences, Indian Institute of Technology
Kharagpur. Ujjwal Singh Rao (ujjwalsrao@gmail.com) is with American
Express.
Economic & Political Weekly

EPW

august 16, 2014

vol xlix no 33

1 Introduction

arket competition is a desirable trait from both an

economic as well as a societal point of view. The first
welfare theorem postulates that competitive equilibrium is Pareto-optimal and a deviation from this optimality
results in a loss of efficiency and welfare. The rationale of efficiency gain through competition has been instrumental in
shaping economic policies of many of the countries across the
globe. In general, such policies aim at developing an environment which is conducive for market competition. In the Indian
context, the basic objective of policy changes since July 1991
has been to facilitate efficient functioning of market forces.
But, with changes in policies resulting in oligopolistic rivalry,
firms have adopted a variety of strategies to sustain and grow
under new business conditions. Success of the new policy regime,
therefore, largely depends on how firms strategically respond
to policy changes and subsequent fine-tuning of policies by the
government that impinge on firm-level choices (Basant and
Mishra 2012). While economic reforms have deepened in many
areas like foreign direct investment, competition policy, privatisation and intellectual property regulation during the last
two decades, the strategy mix of firms has also changed following the changes in the economic and policy environment.
Given such dynamic relationships, designing a comprehensive policy framework for greater competition requires a
deeper understanding of structure of different markets and
their changes over the years. A market is generally characterised by the number and size distribution of buyers and sellers,
barriers to entry and exit, and the extent of product differentiation. However, in empirical research, the structure of a market is examined in terms of degree of sellers concentration as
it is an important feature of imperfect competition. Industrial
organisation literature suggests a number of alternative measures of market concentration such as n-firm concentration ratio
(CR n), Herfindahl-Hirschman Index (HHI), price-cost margin
(PCM), profitability, etc, and conclusions on market structure
may differ depending on the measure used.
Following the criteria suggested by Ginevicius and Cirba
(2009), Mishra, Mohit and Parimal (2011) have attempted to
examine the accuracy of various additive measures of market
concentration in the Indian manufacturing sector. It is found
that, although the HHI is widely used to examine market
structure,1 it is not a very accurate measure, particularly in
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SPECIAL ARTICLE

comparison with other additive indices.2 Instead, the GRS appears to be the most accurate measure of market concentration in the Indian context.3
Hence, a better understanding of market structure requires
use of appropriate indices. This is very important as observed
market structure can influence industry-specific policies. Further,
while the thrust of the current policy regime is to enhance
market competition, the relationship between competition
and concentration is not very clear. A decrease in market concentration may not necessarily correspond to an increase in
market competition.4 A market even with high concentration
may have stiff competition among firms.5 Similarly, a market
with a low degree of sellers concentration may suffer from the
problem of monopolistic behaviour of the dominant firms,
particularly when the rest of the market is distributed across a
large number of small firms.6 This means that the definition of
competition should not be restricted to a low degree of sellers
concentration alone and whether high market concentration
will correspond to low competition also depends on the distribution of relative size of firms. Even if degrees of sellers concentration in two markets are equal, the market with more
uniform distribution of shares is likely to be more competitive.7 In other words, a low degree of sellers concentration is
neither necessary nor sufficient to have greater market competition as the extent of inter-firm rivalry depends on their size
distribution as well. Since additive measures fail to account for
inequality of firm size distribution adequately,8 they may not
be appropriate for understanding the extent of competition in
the market. Further, inequality of market shares has important
implications for strategic behaviour of firms. Hence, conclusions about market structures solely on the basis of additive
measures may be misleading.
In this perspective, the present paper attempts to understand how conclusions on structure of different markets in
Indian manufacturing sector may vary depending on the use
of additive and inequality measures. Additive measures are
more sensitive to the number of firms in the market whereas
inequality measures are influenced by the distribution of market shares. The paper is divided into four sections. The second
section provides an outline of different inequality measures.
The structure of different markets in Indian manufacturing
sector is then examined by using these inequality measures. A
comparative analysis on observed market structure according
to additive and inequality measures is carried out in the third
section. The fourth section concludes the paper with some
insights on the criterion that can be applied to examine appropriateness of various inequality measures.
2 Inequality Measures and Market Structure

The present paper uses four measures of dispersion, viz, relative

mean deviation (RMD), coefficient of variation (CV), relative
entropy coefficient (REC), and the Gini coefficient (GINI) to examine inequality in firm size distribution. Although these inequality measures are generally used to measure income inequality, they have often been applied to understand firm size inequality as well. For example, Barla (2000) used GINI on capacity
60

shares9 as a measure of firm size inequality. On the other hand,

Hannan (1997) used CV of firm output to capture firm size inequality, whereas Du and Chen (2010) examined the extent of
inequality in size of firms on the basis of CV, GINI, RMD, REC,
and variance of logarithms. The mathematical formulae and the
basic properties of each of these measures are discussed below.
Relative Mean Deviation: RMD is a dimensionless number
which is computed using the following formula:
n
1
RMD =
| xi x |
2 n x i=1
Here, x i refers to size of ith firm (measured by sales of goods),10
x to average firm size, and n for number of firms in the industry. The measure captures the extent to which size of an individual firm differs from the average firm size in the industry.
Higher the RMD, greater is the inequality in size distribution of
firms, and hence lesser is the extent of market competition.
Coefficient of Variation: CV is a standard measure of dispersion. It is the standard deviation of size of all the firms in the
industry normalised by its average. Like RMD, CV is also a unit
free measure and is comparable across industries due to its
normalisation. Mathematically, CV is computed as,
1
1 n
CV = (xi x)2
x
n i=1
Here x i stands for size of ith firm (measured by sales of goods),
and x for average firm size and n for number of firms in the industry. A higher CV indicates lesser competition in the industry. However, the basic difference between RMD and CV is that
the former gives equal weight to all the deviations irrespective
of their size, whereas CV assigns larger weight to larger deviation with the deviation itself being the weight.

Relative Entropy Index: The entropy index is a measure of

uncertainty in information theory. In its basic form, the value
of the index lies between 0 and ln(n), where n stands for the
number of firms in the industry. This makes the index incomparable across industries. In order to make the index comparable, the entropy index is divided by ln(n) so that it is restricted
to the interval [0,1]. Mathematically, the relative entropy index is computed as follows:
1 n ln 1
s

RE =
si
ln(n) i = 1 i
Here si refers to the share of ith firm in total sales of goods in
the industry.

()

Gini Coefficient: GINI is computed by taking the ratio of the

area between the Lorenz Curve and the equality line to the
total area under the equality line. Being a ratio of two similar
quantities, GINI is also a dimensionless measure and hence is
comparable across industries. Mathematically, GINI can be calculated as
n n
1
GINI =
| xi xj |
2
n x i=1 j=1
Here x i stands for size of ith firm (measured by sales of goods),
x for average firm size and n for number of firms in the industry.
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SPECIAL ARTICLE

For an infinite sample, the GINI coefficient varies between zero

and unity, whereas the upper bound is (1 1/n) for a finite
sample. Closer the value is to zero, greater is the extent of
competition in the market.11
Given these definitions, what follows is an attempt to understand market structure of 34 major industries in Indian manufacturing sector. We measure firm size inequality in different
markets using all the four indices for the period 1988-89 to
2007-08. Necessary data are collected from the Prowess
Database of the Centre for Monitoring Indian Economy (CMIE).
The decision criteria used for relative classification of markets
is mentioned in Table 1.12
Table 2 presents the relative classification of industries on
the basis of average value of the four inequality measures
during 1989-2008.13 It is observed that, like additive measures
(Mishra, Mohit and Parimal 2011), there are inconsistencies in

classification of industries across various inequality measures.

For example, inequality in market share in information
technology appears to be high according to all the four indices.
On the other hand, three out of the four indices show that inequality is moderately high in electricity, petroleum products
and polymers, and reasonably low in automobile ancillaries.
But, while REC shows high inequality in electrical machinery,
it is not so for rest of the measures. Likewise, according
to RMD and GINI, inequality is high in alkali, but none of the
industries appears to be in the same category when CV and
REC are considered. Such inconsistencies are also observed
when the industries are grouped according to moderately high
or moderately low inequality in market share. Even in case of
indecision, the group of industries is not consistent across
different inequality measures.
3 Comparison of Additive and Inequality Measures

Table 1: Decision Criteria Used for Classification of Industries

Criteria

Decision

C > C + 2

High inequality of market share for RMD, CV, and GINI

Low inequality of market share for REC
Moderately high inequality of market share for RMD, CV,
and GINI
Moderately low inequality of market share for REC
Indecision
Moderately low inequality of market share for RMD, CV,
and GINI
Moderately high inequality of market share for REC
Low inequality of market share for RMD, CV, and GINI
High inequality of market share for REC

C + < C < C + 2

C <C<C+
C 2 < C < C

C < C 2

Here, C denotes average value of the measure and denotes its standard deviation.

This section attempts to compare the relative positions of

industries across inequality indices and additive measures. In
addition to inequality indices, a separate ranking of industries
is done on the basis of additive measures as well. The four additive measures used for the measurement of market concentration include the HHI, HOR, entropy index (ENT), Ginevicius
index (GIN) and GRS index.14
Ranks of different industries using both additive and
inequality measures are given in Table 3. Here, the highest
rank, i e, 1 stands for the industry with the highest value of
the measure (except ENT and REC). In case of ENT and REC,
the 1st rank has been assigned to the industry with lowest

Table 2: Classification of Industries Based on Average Values of the Inequality Indices

Group

RMD

CV

REC

High

Information Technology

Information Technology

Electrical Machinery, Information Information Technology

Technology
Cosmetics, Electricity, Petroleum Cosmetics, Electricity, Electronics,
Products, Polymers
Ferrous Metals, Petroleum
Products, Polymers
Automobile Ancillaries
Automobile Ancillaries,
Diversified, Inorganic Chemicals,
Ready-made Garments
Alkali
Alkali, Automobile,
Automobile,
Beverages and Tobacco,
Beverages and Tobacco,
Cotton Textiles, Diversified,
Cotton Textiles,
Drugs and Pharmaceuticals,
Drugs and Pharmaceuticals,
Dyes and Pigments, Electronics, Dyes and Pigments,
Ferrous Metals, Fertilisers,
Electrical Machinery, Fertilisers,
Food Products,
Food Products,
Inorganic Chemicals,
Misc Manufacturing,
Misc Manufacturing,
Non-electrical Machinery,
Non-electrical Machinery,
Non-ferrous Metals,
Non-ferrous Metals,
Non-metallic Mineral Products,
Non-metallic Mineral Products, Organic Chemicals,
Organic Chemicals,
Other Chemicals, Other Textiles,
Other Chemicals, Other Textiles, Paints and Varnishes,
Paints and Varnishes, Pesticides, Pesticides,
Plastic Products,
Plastic Products,
Readymade Garments,
Rubber and Rubber Products,
Rubber and Rubber Products,
Synthetic Textiles,
Synthetic Textiles,
Textile Processing,
Textile Processing,
Tyres and Tubes
Tyres and Tubes

Moderately High Electricity, Non-ferrous Metals,

Petroleum Products, Polymers
Moderately Low

Low
Indecision

Ferrous Metals

Automobile Ancillaries, Diversified,

Inorganic Chemicals, Readymade
Garments
Alkali
Automobile,
Beverages and Tobacco,
Cosmetics, Cotton Textiles,
Drugs and Pharmaceuticals,
Dyes and Pigments,
Electrical Machinery, Electronics,
Ferrous Metals, Fertilisers,
Food Products, Misc Manufacturing,
Non-electrical Machinery,
Non-metallic Mineral Products,
Organic Chemicals, Other Chemicals,
Other Textiles, Paints and Varnishes,
Pesticides, Plastic Products,
Rubber and Rubber Products,
Synthetic Textiles, Textile Processing,
Tyres and Tubes

Economic & Political Weekly

EPW

august 16, 2014

Alkali, Automobile,
Automobile Ancillaries,
Beverages and Tobacco, Cosmetics,
Diversified,
Drugs and Pharmaceuticals,
Dyes and Pigments,
Electrical Machinery, Electricity,
Electronics, Fertilisers,
Food Products, Inorganic Chemicals,
Misc Manufacturing,
Non-electrical Machinery,
Non-ferrous Metals,
Non-metallic Mineral Products,
Organic Chemicals, Other Chemicals,
Other Textiles, Paints and Varnishes,
Pesticides, Petroleum Products,
Plastic Products, Polymers,
Ready-made Garments,
Rubber and Rubber Products,
Synthetic Textiles,
Textile Processing, Tyres and Tubes

vol xlix no 33

GINI

61

SPECIAL ARTICLE
Table 3: Ranking of Industries Based on the Additive and the Inequality
Measures

Table 4: Coefficient of Variation in Rankings of Industries across Different

Measures of Market Structure

Industry

Industry

Alkali
Automobile
Automobile ancillaries
Beverages and tobacco
Cosmetics
Cotton textiles
Diversified
Drugs and pharmaceuticals
Dyes and pigments
Electrical machinery
Electricity
Electronics
Ferrous metals
Fertilisers
Food products
Information technology
Inorganic chemicals
Misc manufacturing
Non-electrical machinery
Non-ferrous metals
Non-metallic mineral products
Organic chemicals
Other chemicals
Other textiles
Paints and varnishes
Pesticides
Petroleum products
Plastic products
Polymers
Ready-made garments
Rubber and rubber products
Synthetic textiles
Textile processing
Tyres and tubes

HHI

1
12
25
18
10
31
8
28
7
26
17
24
33
9
34
30
13
32
27
15
29
21
19
22
2
6
5
23
4
14
11
20
16
3

8
10
31
6
3
33
25
32
15
30
4
22
13
18
34
1
23
29
20
11
27
24
16
19
7
14
5
28
2
17
12
26
21
9

Additive Measures
Inequality Measures
HOR ENT GIN GRS RMD CV REC GINI

8
10
29
7
4
33
25
32
14
31
5
20
12
22
34
1
21
28
17
11
26
24
16
19
6
15
3
30
2
18
13
27
23
9

7
11
32
9
6
33
19
30
13
29
4
22
25
15
34
1
18
31
26
10
27
21
17
23
5
14
2
28
3
16
12
24
20
8

1
15
26
18
7
32
16
28
12
27
9
25
33
17
34
3
13
31
29
19
30
21
20
23
2
11
6
24
4
8
10
22
14
5

9
10
29
4
3
34
25
32
17
30
5
19
8
24
33
1
21
28
12
14
26
23
16
15
7
18
6
31
2
20
13
27
22
11

34
12
32
8
6
28
33
16
21
22
3
9
7
17
19
1
31
14
10
5
11
18
15
23
13
24
2
26
4
30
25
27
29
20

33
14
30
4
6
34
31
16
23
17
3
8
2
28
13
1
29
11
5
12
9
18
15
32
19
26
10
20
7
27
21
24
22
25

33
12
34
7
6
32
31
25
20
2
3
11
8
19
28
1
27
22
13
10
16
18
15
21
9
23
4
29
5
26
17
30
24
14

34
12
30
8
6
27
33
16
22
20
3
7
5
21
17
1
32
13
10
9
11
18
15
19
14
26
2
23
4
31
25
28
29
24

The column n shows ranking of industries on the basis of average number of firms between
1988-89 and 2007-08.

value of the measure. Similarly, in case of number of firms

(n), the highest rank refers to the industry having the least
(average) number of firms during 1988-89 to 2007-08.15 It is
observed that ranking of industries in respect of market
structure differs across different measures. In addition, there
are inconsistencies in ranking of industries within different
additive or inequality measures as well. For example, in
case of non-electrical machinery, there is disparity in
ranks assigned by both additive and inequality measures.
Among additive measures, the GIN index ranks this industry
towards the bottom end, whereas the GRS index ranks it
at nine. Similarly, among inequality measures, CV ranks
this industry as fifth, whereas it is in the 13th position
according to REC.
Such inconsistencies have been reflected in high coefficient
of variations in ranking across different measures for many of
the industries (Table 4). Such high coefficients of variation for
a majority of the industries indicate inconsistencies in their
ranking across different measures. However, for some of
the industries, variation in ranking is less across different
62

Coefficient of Variation in Rankings

Additive Measures Inequality Measures

Alkali

0.49

0.02

All

0.87

Automobile

0.19

0.08

0.14

Automobile ancillaries

0.08

0.06

0.09

Beverages and tobacco

0.62

0.28

0.57

Cosmetics

0.39

0.00

0.36

Cotton textiles

0.02

0.11

0.08

Diversified

0.19

0.04

0.33

Drugs and pharmaceuticals

0.06

0.25

0.27

Dyes and pigments

0.14

0.06

0.31

Electrical machinery

0.05

0.59

0.38

Electricity

0.38

0.00

0.79

Electronics

0.11

0.20

0.43

Ferrous metals

0.57

0.48

0.79

Fertilisers

0.19

0.23

0.27

Food products

0.01

0.33

0.30

Information technology

0.64

0.00

2.22

Inorganic chemicals

0.20

0.07

0.30

Misc manufacturing

0.05

0.32

0.35

Non-electrical machinery

0.33

0.35

0.49

Non-ferrous metals

0.28

0.33

0.33

Non-metallic mineral products

0.06

0.25

0.40

Organic chemicals

0.07

0.00

0.12

Other chemicals

0.10

0.00

0.11

Other textiles

0.17

0.24

0.21

Paints and varnishes

0.38

0.30

0.65

Pesticides

0.17

0.06

0.39

Petroleum products

0.41

0.84

0.56

Plastic products

0.10

0.16

0.14

Polymers

0.34

0.28

0.42

Ready-made garments

0.29

0.08

0.36

Rubber and rubber products

0.10

0.17

0.36

Synthetic textiles

0.09

0.09

0.12

Textile processing

0.18

0.14

0.22

Tyres and tubes

0.26

0.24

0.60

Neg - Negligible.

inequality indices vis--vis that across additive measures.

This means that, when compared to additive measures, inequality indices are more consistent. For example, ranking of
alkali by inequality indices is more consistent as compared to
that by additive measures. Moreover, for industries like cosmetics, electricity, information technology, organic chemicals
and other chemicals, the ranking is the same across all the
inequality measures.
The pairwise correlation coefficients between the values of
various indices are presented in Table 5 (p 63). It is observed
that ENTs and RECs have a negative correlation with other
measures due to their definition. While a high value of other
measures denotes a high degree of market concentration, the
opposite is true for ENT and REC. A high value of these measures denotes a more egalitarian distribution of market shares
across firms. It is seen that there exists a high degree of correlation among different inequality measures as well as among
various additive indices. But, the correlation across these two
sets of measures is not very strong. For example, GINI does not
show a statistically significant correlation with ENT and GIN
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SPECIAL ARTICLE

show poor correlation with

the number of firms operatN
HHI
GIN
GRS
RMD
GINI
ing in the market.
Concentration N
1.0000
Table 6 shows changes in
Measures
HHI
-0.2311 1.0000
market
structure of different
HOR -0.3901* 0.9576* 1.0000
industries
during the postENT
0.6523* -0.8493* -0.9331* 1.0000
reform period. In order to
GIN
-0.5722* 0.6989* 0.7642* -0.8422* 1.0000
understand these changes, all
GRS
-0.2396 0.9761* 0.9713* -0.8390* 0.6591* 1.0000
Inequality
RMD
0.1374 0.7167* 0.6788* -0.4985* 0.1243 0.7249* 1.0000
the measures of market strucMeasures
CV
0.3407* 0.7227* 0.5956* -0.3890* 0.1680 0.7021* 0.7806* 1.0000
ture are averaged for the
REC
0.0243 -0.7694* -0.7163* 0.5690* -0.3143 -0.7580* -0.8038* -0.7083* 1.0000
periods 1993-94 to 1999-2000
GINI
0.2481 0.5852* 0.5447* -0.3310 -0.0627 0.6220* 0.9717* 0.7312* -0.7449* 1.0000 and 2000-01 to 2007-08, and
*Statistically significant at 5% level.
then a comparison is made
between the average values. It is observed that, like the level,
Table 6: Changes in Market Structure during 1993-94 to 2007-08
Industry
Concentration Measures
Inequality Measures
changes in market structure also appear to be inconsistent
N HHI HOR ENT GIN GRS RMD CV REC GINI
across different measures for most of the industries. There
Alkali
+ + + + + + + + + +
are a few industries like alkali, cosmetics, pesticides and texAutomobile
- +
- +
tile processing, for which changes in market structure are
Automobile ancillaries
- N +
- N
consistent across different measures. On the other hand,
Beverages and tobacco
- + +
- N +
- +
N N
changes across different measures are contradictory for many
Cosmetics
industries like cotton textiles, non-metallic minerals, plastic
Cotton textiles
- N + + N
N + + + +
products, ready-made garments, etc. However, changes
Diversified
+ + + + + + + + + +
across inequality indices are found to be more consistent
Drugs and pharmaceuticals
- + + +
- + + + + +
vis--vis the additive measures.
Dyes and pigments
- + +
- +
- +
N
Table 5: Correlation Coefficients between Various Measures of Structure
Concentration Measures
HOR
ENT

Inequality Measures
CV
REC

Electrical machinery

Electricity

4 Selection of an Appropriate Measure

Electronics

Ferrous metals

Thus, while levels as well as changes in market structure

differ across alternative measures, the observations are
more consistent for inequality indices. However, even within
inequality measures, there are variations in conclusions on
market structure. This raises an important question, how
does one choose between various inequality measures?
Ginevicius and Cibra (2009) have suggested a criterion to
judge the accuracy of various additive measures of market
concentration, and on the basis of this criterion they found
the GRS to be a better measure than others as it keeps the distortion in relative importance of firms to the minimum.16
Since inequality measures are not additive in nature, it is
difficult to apply this criterion for these indices. Besides, the
overall contribution of each firm to inequality measures
cannot be segregated easily. However, the existing literature
(e g, Allison 1978) suggests that every inequality measure
should satisfy two desirable properties, viz, (i) scale invariance, and (ii) the principle of transfers. According to the
property of scale invariance, if all individual entities are
multiplied by a constant (say k), value of the inequality
measure should remain unchanged. On the other hand, if a
constant is added to each value then the inequality measure
should decline. According to the principle of transfers, for any
two entities x i and x j, such that x i < x j, if a transfer is made
from x i to x j then the value of inequality measure should
increase (Dalton 1920).
Selection among the above four inequality measures can be
done on the basis of these two criteria. Since RMD, CV GINI are
normalised by the mean (x) and REC is calculated using market shares, the property of scale invariance is satisfied.17

Fertilisers

Food products

Information technology

Inorganic chemicals

Misc manufacturing

Non-electrical machinery

Non-ferrous metals

Non-metallic mineral products -

Organic chemicals

+
+

Other chemicals

Other textiles

Paints and varnishes

Pesticides

Petroleum products

Plastic products

Polymers

Readymade garments

Rubber and rubber products

Synthetic textiles

Textile processing

Tyres and tubes

Here, + stands for an increase in concentration or inequality, - for a decline and, and
N stands for no change. Given the nature of their interpretation, necessary adjustments
have made for ENT and REC. The comparison is made between average values of the index
for the periods 1993-94 to 1999-2000 and 2000-01 to 2007-08. The values have been
rounded off to two decimal places for comparison. In case of GIN, three decimal points have
also been considered.

and its correlation with other additive measures is less than

0.6. Similarly, the correlation of GIN with the inequality measures is not statistically significant. It is interesting to note that
unlike additive measures, most of the inequality measures
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vol xlix no 33

63

SPECIAL ARTICLE

If sales of all the firms in a market segment increase by a constant factor, values of these measures will remain unchanged.
However, RMD fails to satisfy the principles of transfers. In
case of RMD, if a transfer is made between any two entities on
the same side of the mean, value of the measure remains unchanged. While the other three measures do satisfy this principle, there is a catch. Corresponding to any particular transfer,
the change in each measure has a different functional dependency on the entities.18
In case of CV, the change depends on the difference in the
entities, whereas for REC, it varies with the changes in the
ratio of entities. When GINI is considered, the change depends
Notes
1 The popularity of the HHI can be gauged from
the fact that it forms the basis on which the
United States Federal Anti-trust Authorities
make their decisions on market competition.
2 Majority of the additive measures of concentration are ridden with bias. For details in this
regard see Mishra et al (2011).
3 The GRS index, suggested by Ginevicius and
Cirba (2009), is based on Taylors series. Unlike
other additive measures, weights to different
firms in this index are assigned in such a way
that (i) the value of the index ranges from 0 to
1, (ii) if all firms in the industry have equal
market share, GRS=1/n, and (iii) it gives a
more accurate measure of market concentration. For the details on derivation of this index
see Ginevicius and Cirba (2009).
4 The majority of existing studies have relied
heavily on measures of concentration to draw
conclusions on market structure with the underlying assumption that higher the concentration less is the competition. However, a crucial
condition for this assumption to hold true is
that measures of concentration must capture
all other relevant aspects like distribution of
market size across firms. But, using data on the
Chinese manufacturing sector, Du and Chen
(2010) found evidence of a weak correlation
between some inequality measures (like the

on the relative ranks of the entities involved in the transfer. As

stated earlier, one of the most popular uses of the measures of
dispersion is to account for income inequality. In this case,
the assumption of diminishing marginal utility of income
simplifies the choice. However, in the present context, choice
across different measures is not that straightforward due to
absence of such assumption. Hence, further research is necessary for designing a criterion that can potentially address
these issues and help in selecting the most appropriate inequality measure. This is very important as conclusions on
market structure appear to be more consistent across different
inequality measures.

entropy index) and additive measures of concentration, and thereby raised questions about
the reliance on additive measures alone.
5 For example, let us consider two markets each
with two firms. Let us further assume that in
the first market the firms have market share
0.60 and 0.40, and market share of the firms
in the second market are 0.5 and 0.5. Hence,
the HHI in the two markets are 0.52 and 0.50
respectively. Here, following the guidelines
of the US Department of Justice, both the
markets should be termed as concentrated.
But from data on market share it appears
that the second market is more competitive
vis--vis the first one as the firms have equal
market share.
6 For example, let us consider a market with 100
firms with the top-three firms having market
share 0.3, 0.15, and 0.05, and the rest of the
market is equally distributed among 97 small
firms. The HHI for this market is as low as
0.117, but the distribution of market share
clearly shows dominance by the top three firms
in the market.
7 Let us consider two markets each with threefirm concentration ratio of 0.6. Let us further
assume that, in the first market, market shares
are distributed as 0.2, 0.2, and 0.2, and it is
distributed as 0.5, 0.05, and 0.05 in the other.
The first market (with no inequality) represents

10

11

12

an oligopoly with high competition among

firms, whereas the second market (with high
inequality) is closer to a monopoly.
According to Rhoades (1995), the HHI, the
most widely used additive measure of market
concentration, fails to capture inequality in
size distribution of firms adequately.
Here, capacity share of a firm is defined as
share of the firm in total productive capacity in
the market.
Although there are various competing variables that can be taken as a proxy for firm size
such as assets, labour employment, capital
employed etc, the present paper use sales of
goods (in value) to understand the structure
of different markets. As most of the firms
want to maximise their share in the relevant
market segment, sales of goods is expected to
capture the structural changes adequately.
Also, the heterogeneity in the industry standards for other competing proxies makes them
less relevant.
In this study, GINI coefficient has been calculated by using relative distribution package
(reldist) in R language developed by Handcock
and Morris (1999). The underlying mathematical formula used by this package is same as
that stated above in the text.
Here, inequality in market share is used as an
indicator of market concentration. Following

REVIEW OF URBAN AFFAIRS

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Patterns and Practices of Spatial Transformation
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Bhuvaneswari Raman
The Politics of Classification and the Complexity of Governance in Census Towns
Gopa Samanta
Intentions, Design and Outcomes: Reflections on IHSDP in Maharashtra
Himanshu Burte
Planning as Practice?: Governing Conjunctures and Informal
Urbanisation in Solapur Town
Lalitha Kamath, Pranjal Deekshit
Changing Structure of Governance in Non-Metropolitan Cities:
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N Purendra Prasad
The Regularising State
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On the Charts, Off the Tracks: Disconnected Development
in Ambur Town, Tamil Nadu
Karen Coelho, M Vijayabaskar
Territorial Legends Politics of Indigeneity, Migration, and Urban Citizenship in Pasighat
Mythri Prasad-Aleyamma
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august 16, 2014

vol xlix no 33

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Economic & Political Weekly

SPECIAL ARTICLE

13
14
15

16

17

Mishra, Mohit and Parimal (2011), inequality is

levelled as high medium and low in a relative
sense, i e, in comparison with other industries
in the sector.
For the actual values of the indices, see Appendix I.
For details on each of these measures, see
Mishra, Mohit and Parimal (2011).
Industries have been ranked in descending order of market concentration/inequality. Hence,
the 1st rank stands for an industry with the
highest concentration or highest inequality
whichever is the case.
For example, if the two firms have market
shares in the ratio of 1:2, their contribution to
the HHI is in the ratio 1:4. Thus, there is a distortion in the relative importance of the two
firms. Among all the additive measures, the
GRS keeps such a distortion to the minimum.
One can view RMD, CV and GINI as fractions
with the numerator consisting of a deviation
and the denominator consisting of mean (x). If
each entity is multiplied by a constant k, the
ratio remains the same as this constant cancels
out. If a constant k is added to each entity, then
the numerator is unchanged but the denominator increases by k thereby decreasing the value
of the fraction. The logic is similar for REC as
well. Multiplication by a constant does not

affect market shares whereas addition of a

constant distorts the relative value of market
shares.
18 Allison (1978) has pointed out the following
changes in different measures:
xj
CoV = ( xj xi ); RE = ; Gini = ( j i)
xi

()

References
Allison, P (1978): Measures of Inequality, American
Sociological Review, Vol 43, No 6, pp 865-80.
Barla, P (2000): Firm Size Inequality and Market
Power, International Journal of Industrial
Organization, Vol 18, No 5, pp 693-722.
Basant, R and P Mishra (2012): How Has the Indian
Corporate Sector Responded to Two Decades
of Economic Reforms in India? An Exploration
of Patterns and Trends, Working Paper,
No 2012-02-02, Indian Institute of Management, Ahmedabad.
Dalton, H (1920): The Measurement of the Inequality of Incomes, The Economic Journal,
Vol 30, No 119, 348-61.
Dasgupta, P, A Sen and D Starrett (1973): Notes on
the Measurement of Inequality, Journal of
Economic Theory, Vol 6, No 2, pp 180-87.
Du, J and M Chen (2010): Market Competition

Measurements and Firms R&D Responses to

Market Competition Pressure, paper presented
at the Chinese Economic Association (UK/
Europe) Conference, Oxford, England, July.
Ginevicius, R and S Cibra (2009): Additive Measurement of Market Concentration, Journal of
Business Economics and Management, Vol 10,
No 3, pp 191-98.
Gini, C (1921): Measurement of Inequality of
Incomes, The Economic Journal, Vol 31, No 121,
pp 124-26.
Handcock, M S and M Morris (1999): Relative
Distribution Methods in the Social Sciences,
Springer-Verlag.
Hannan, T H (1997): Market Share Inequality,
the Number of Competitors, and the HHI: An
Examination of Bank Pricing, Review of Industrial Organization, Vol 12, No 1, pp 23-35.
Kendall, M and A Stuart (1977): The Advanced
Theory of Statistics (New York: Macmillan).
Mishra, P, D Mohit and Parimal (2011): Market
Concentration in Indian Manufacturing Sector:
Measurement Issues, Economic & Political
Weekly, Vol 46, No 49, pp 76-80.
Rhoades, S A (1995): Market Share Inequality,
the HHI, and Other Measures of the Firm
Composition of a Market, Review of Industrial
Organization, Vol 10, No 6, pp 657-74.

Appendix I
Average Values of the Inequality and Concentration Indices (1989 to 2008)
Industry

Alkali
Automobile
Automobile ancillaries
Beverages and tobacco
Cosmetics
Cotton textiles
Diversified
Drugs and pharmaceuticals
Dyes and pigments
Electrical machinery
Electricity
Electronics
Ferrous metals
Fertilisers
Food products
Information technology
Inorganic chemicals
Misc manufacturing
Non-electrical machinery
Non-ferrous metals
Non-metallic mineral products
Organic chemicals
Other chemicals
Other textiles
Paints and varnishes
Pesticides
Petroleum products
Plastic products
Polymers
Ready-made garments
Rubber and rubber products
Synthetic textiles
Textile processing
Tyres and tubes
Economic & Political Weekly

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HHI

13
49
190
72
48
292
44
250
44
199
70
186
429
46
554
272
51
366
231
65
250
84
75
110
21
44
36
179
35
60
48
83
69
24

0.16
0.12
0.03
0.22
0.31
0.02
0.06
0.02
0.09
0.03
0.27
0.07
0.11
0.07
0.01
0.57
0.07
0.03
0.07
0.12
0.04
0.06
0.08
0.07
0.22
0.09
0.26
0.03
0.36
0.08
0.12
0.04
0.07
0.14

august 16, 2014

Concentration Measures
HOR
ENT

GIN

GRS

RMD

0.42
0.36
0.13
0.49
0.58
0.09
0.20
0.11
0.29
0.12
0.56
0.24
0.33
0.24
0.09
0.77
0.24
0.14
0.26
0.35
0.17
0.22
0.28
0.26
0.52
0.28
0.58
0.13
0.63
0.26
0.32
0.17
0.23
0.39

0.09
0.02
0.01
0.02
0.04
0.00
0.02
0.01
0.03
0.01
0.04
0.01
0.00
0.02
0.00
0.06
0.03
0.00
0.01
0.02
0.00
0.02
0.02
0.01
0.06
0.03
0.04
0.01
0.06
0.04
0.04
0.01
0.02
0.05

0.28
0.25
0.10
0.44
0.53
0.07
0.12
0.08
0.18
0.08
0.42
0.17
0.29
0.14
0.07
0.72
0.16
0.11
0.23
0.21
0.12
0.14
0.21
0.21
0.37
0.17
0.42
0.08
0.57
0.17
0.23
0.11
0.16
0.23

0.38
0.63
0.47
0.68
0.69
0.50
0.46
0.58
0.55
0.54
0.77
0.68
0.68
0.57
0.57
0.88
0.48
0.61
0.65
0.71
0.63
0.57
0.59
0.54
0.62
0.53
0.78
0.53
0.72
0.48
0.53
0.51
0.50
0.56

vol xlix no 33

2.13
2.58
4.38
2.42
1.93
4.68
3.14
4.28
2.82
4.23
1.68
3.44
3.73
2.89
5.03
0.99
3.09
4.30
3.77
2.57
3.99
3.29
3.08
3.49
1.87
2.83
1.64
4.10
1.64
3.01
2.77
3.57
3.20
2.25

Inequality Measures
CV
REC

1.03
2.23
1.26
3.81
3.65
0.48
1.23
2.13
1.64
2.01
3.92
3.30
6.31
1.52
2.41
11.43
1.48
2.72
3.81
2.57
2.92
1.96
2.15
1.20
1.90
1.53
2.88
1.89
3.35
1.52
1.79
1.57
1.66
1.55

0.84
0.67
0.85
0.58
0.52
0.83
0.83
0.79
0.76
0.34
0.46
0.67
0.62
0.76
0.81
0.24
0.81
0.76
0.70
0.63
0.73
0.76
0.73
0.76
0.63
0.77
0.47
0.81
0.47
0.80
0.75
0.81
0.79
0.71

GINI

0.48
0.78
0.63
0.83
0.84
0.67
0.60
0.74
0.69
0.71
0.86
0.83
0.84
0.70
0.73
0.94
0.63
0.77
0.81
0.82
0.80
0.73
0.74
0.71
0.75
0.67
0.88
0.69
0.85
0.63
0.68
0.66
0.66
0.69

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