The myth of the unique decomposability: specializing the Herfindahl and entropy measures?

✍ Scribed by William Acar; Kizhekepat Sankaran

• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 57 KB
• Volume: 20
• Category: Article
• ISSN: 0143-2095
• DOI: 10.1002/(sici)1097-0266(199910)20:10<969::aid-smj57>3.0.co;2-0

✦ Synopsis

This research note investigates the trend towards specializing the Herfindahl index H for measuring industry concentration and the entropy measure E for expressing firm diversity. Examining the "decomposability" of E and H, we show that the professed overriding advantage of the entropy measure with respect to decomposability is not its exclusive preserve; the paper contains a proof that this property is also shared by the Herfindahl index. It is also shown that, due to its more stable range, the H index is more versatile with respect to inversion than the E measure. Strategy researchers are thereby cautioned that the current trend toward an increased use of entropy is risky and should be reassessed.