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

William Acar and Kizhekepat Sankaran

Strategic Management Journal, 1999, vol. 20, issue 10, 969-975

Abstract: 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. Copyright © 1999 John Wiley & Sons, Ltd.

Date: 1999
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