An index for carrots

Carrots, we all know, are bright orange, conical or cylindrical root vegetables. Great in salads, stews, the eponymous cake and divine in the Indian dessert Halva. 

They are also produced in the USA in a market structure that, if it were something people really cared about, would provoke federal government anti-trust action.

80% of all carrots sold in America are produced by two companies. And this provides a nice opportunity to think about market concentration.

The US federal government has a way of determining if a market is too concentrated, if there are too few vendors for it to be a genuinely open, vibrant and competitive marketplace. This is known by the slightly daunting name of the Herfindahl–Hirschman index. The daunting name deceives; it’s actually a very simple way of gauging how concentrated a market is. 

Imagine, for example, a market place that has 6 competitors holding 100% of the entire market.

·         In case 1, two competitors have 40% each and the next 4 have 5% each;

·         In case 2, 90% of the market is equally distributed -  16.7% apiece.

To calculate the HHI, one squares each percentage, then adds them all up.

Table: Calculating HHI for two cases of a six-vendor market

	Case 1		Case 2
	Market share	Share squared	Market share	Share squared
Company 1	40%	1600	16.7%	278
Company 2	40%	1600	16.7%	278
Company 3	5%	25	16.7%	278
Company 4	5%	25	16.7%	278
Company 5	5%	25	16.7%	278
Company 6	5%	25	16.7%	278
TOTAL		3300		1667

The HHI case for Case1 is 3300; for Case 2 it's 1667. (Rather often, these are represented as the same number divided by 10,000 – so the HHIs above become 0.33 and 0.167.)

The federal government considers as highly concentrated any market place with an HHI over 2500 – carrots are WAY above that line. (The actual HHI index for carrots is likely far higher, since it’s most likely that the top two competitors won’t each have 40% - and the index will rise briskly if one is larger than the other; and it is also probable that the next competitors are far smaller than 5% of the national market.)

And, for the case of carrots, nobody cares, it seems. Why should they?

“As market concentration increases, competition and efficiency decrease and the chances of collusion and monopoly increase.” But carrots are cheap, universally available – and there’s even been a market innovation – “baby carrots”. “Baby carrots” are, of course, not root vegetables untimely snatched from their dirt-bound beds. They’re full-grown carrots that have been peeled, sliced and polished into uniform 2”-long chunks that look like what we imagine baby carrots might be. And they’re washed and packaged into sealed bags so that we can plop them into salads or lunch bags or stews or carrot cake or Halva, without all the chopping and peeling and washing associated with real root vegetables. And, again, they’re cheap. There is only one problem routinely apparent to me with “baby carrots”: they don’t actually taste like carrots. They are sweet and watery and lack a root-vegetable taste and flavor, but rather taste more as a strange hybrid of carrots and watermelons, perhaps.

And they are the fruit, so to speak, of some technical innovation, as well: volume-produced carrots aren’t dug by hand from earth. Rather, they and their roots grow in a sort of outdoors rug that lies on the dirt. Come harvest time, the rug is peeled up (hah!) revealing the carrots hanging down … where they are sheared off. All of this, of course, is done by harvesting machine.

Behold, then, the lowly American carrot as an exemplar of modern economic forces. It comes to us as the product of some innovations. It exemplifies the commonplace trend that values convenience and cost over choice and quality. It is the harvest of agricultural-industrial processes that have reached an endgame of concentration. And in these ways, for good and bad, the carrot is the future of many goods and services.