Market share inequality, the HHI, and other measures of the firm-composition of a market

Data for individual markets suggest that the Herfindahl-Hirschman Index does not fully account for the inequality of market shares and the number of firms in a market. An empirical investigation is conducted to determine whether share inequality, number of firms, and major firm presence affect market profit rates independent of the HHI. The analysis controls for efficiency, among other things. Test results based on 1,684 banking markets during 1990-1992 indicate that the HHI, market share inequality, and the importance of major firms are positively related and the number of firms is negatively related to profit rates. Results on several other variables also suggest that market imperfections exist in local banking markets.