Herfindahl Concentration with an Import Fringe and with Supply Constraints

Abstract

The widely used Herfindahl index of concentration measures market power incorrectly in cases where a core of sellers faces a competitive fringe or where some subset of sellers is supply-constrained. These cases arise, for example, where domestic sellers face a small fringe of imports, or where import supply of any magnitude is limited by natural or artificial constraints. Returning to the theoretical roots of the Herindahl, this paper demonstrates how the index should be modified to deal with such circumstances.