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The Myth of the Unique Decomposability: Specializing the Herfindahl and Entropy Measures?

William Acar and Kizhekepat Sankaran
Strategic Management Journal
Vol. 20, No. 10 (Oct., 1999), pp. 969-975
Published by: Wiley
Stable URL: http://www.jstor.org/stable/3094158
Page Count: 7
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The Myth of the Unique Decomposability: Specializing the Herfindahl and Entropy Measures?
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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.

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