Re-evaluating Diversity Measures: Calibrating for Scope to Capture the Distribution Effect

This paper has practical implications in three areas of application in corporate management: strategy research corporate planning governmental regulation. The authors’ review of the literature reveals a trend toward an increased use of the uncalibrated Herfindahl Index by regulators and of the uncalibrated Entropy measure by researchers. This trend involves considerable risks if it continues unabated into the new century. In the latter domain, the lack of discrimination power of current indices of concentration or diversification is becoming a major problem in that limit values specified by regulations are based on biased indicators. These are compounded when the Herfindahl Index becomes the sole anti-trust instrument for industry regulation as has been codified in the US by the guidelines jointly issued in 1992 by the Federal Trade Commission and the US Department of Justice. Complementing the empirical investigations published in the research literature over the last ten years, this paper examines the existing measures of industry concentration or product-line diversity on theoretical grounds and found them wanting in certain