Final answer:
Economists use the four-firm concentration ratio and the Herfindahl-Hirschman Index (HHI) to measure industry concentration, both having unique calculations and shared weaknesses.
Step-by-step explanation:
Economists measure the degree of industry concentration using two main methods, the four-firm concentration ratio and the Herfindahl-Hirschman Index (HHI). The four-firm concentration ratio assesses the total market share held by the four largest firms in the industry. On the other hand, HHI is calculated by summing the squares of the market shares of each firm within the industry. This method considers the distribution of market power more thoroughly, as it gives greater weight to firms with larger market shares. Both methods have their weaknesses, including the assumption of well-defined markets and comparable competitive conditions across industries. However, regulators often use these indices to evaluate the potential effects of mergers and maintain fair competition.