A General Concentration Index for Multiproduct Firms with Differentiated Products

Economists commonly use the Herfindahl-Hirschman Index (HHI) to measure the competitiveness of markets. However, the HHI has two significant problems. First, defining the market boundaries can be arbitrary. Second, the products included in the defined market are effectively assumed to be homogeneous. This paper proposes a differentiated product concentration index (DPCI) that reduces these problems by weighing substitutes differentially. The DPCI mitigates the problematic effects of expanding a market definition to change the perceived degree of competition. The DPCI has many desirable properties and collapses to the HHI when products are homogeneous.