HERFINDAHL CONCENTRATION WITH AN IMPORT FRINGE AND WITH SUPPLY CONSTRAINTS

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