Q10Restructured Power System
Question
Q.10. What is Entropy Coefficient?
Answer
The Entropy Coefficient is a market concentration/competitiveness measure derived from information theory, calculated from the market shares of participating firms, where higher entropy indicates a more even distribution of market share (greater competition) and lower entropy indicates concentration in fewer firms.
The Entropy Coefficient is an alternative market concentration index (to HHI) borrowed from information theory, computed as E = -Σ(si·ln(si)), where si is the market share (as a fraction) of firm i in the market; unlike HHI, entropy increases as market share becomes more evenly distributed across many firms (representing greater competition and lower market power potential) and decreases toward zero as the market becomes dominated by a single firm (representing maximum concentration), providing regulators and market analysts with a complementary perspective on the competitiveness of a restructured electricity market alongside HHI.