ERIC STEVANUS 2201756600 LA28

1. Ten firms compete in a market to sell product X. The total sales of all firms selling the
product are $2 million. Ranking the firms’ sales from highest to lowest, we find the top
four firms’ sales to be $260,000, $220,000, $150,000, and $130,000, respectively.
Calculate the four-firm concentration ratio in the market for product X.

ST = $2,000,000
S1-4 = 260,000+220,000+150,000+130,000= $760,000
The four-firm concentration ratio (C4) = 760,000/2,000,000 = 0.38 / 38%

2. An industry consists of three firms with sales of $300,000, $700,000, and $250,000.

a. Calculate the Herfindahl-Hirschman index (HHI).

300,000 2 700,000 2 2
250,000
HHI = 10,000 [(
1,250,000
+ )(
1,250,000
+ ) (
1,250,000 )]
= 4112

b. Calculate the four-firm concentration ratio (C4).

C4 = (300,000+700,000+250,000)/1,250,000 = 100% ( olygopoly)

c. Based on the FTC and DOJ Horizontal Merger Guidelines described in the
text, do you think the Department of Justice would attempt to block a
horizontal merger between two firms with sales of $300,000 an $250,000?
Explain.

550,000 2 2
700,000
HHI = 10,000 [( 1,250,000)(+
1,250,000 )]
= 5,072
If the firms with sales of $300,000 and $250,000 were allowed to merge,
the resulting HHI would increase by 960 to 5,072. Since the post-merger
HHI exceeds that under the Guidelines (2,500) and the HHI increases by
more than that permitted under the Guidelines (200), the merger is likely
to be challenged.

3. Suppose the own price elasticity of market demand for retail gasoline is −0.8, the
Rothschild index is 0.5, and a typical gasoline retailer enjoys sales of $1.5 million annu-
ally. What is the price elasticity of demand for a representative gasoline retailer’s
product?

0.5 = -0.8 / Ef
Ef = -0.8 / 0.5 = -1.6
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4. A firm has $1.5 million in sales, a Lerner index of 0.57, and a marginal cost of $50, and
competes against 800 other firms in its relevant market.

a. What price does this firm charge its customers?

1
P =( 1−0.57 )50
= $116.28

b. By what factor does this firm mark up its price over marginal cost?

𝑃=(1/1−𝐿)𝑀𝐶
1
mark up factor= ( 1−0.57 ) = 2,326
The firm’s markup factor is 2,326 times the marginal cost.

c. Do you think this firm enjoys much market power? Explain.

Lerner index is closer to 1, which means that there are no rigorous

price competition in the market, and that the firms enjoys market power.

5. Evaluate the following statement: “Managers should specialize by acquiring only the
tools needed to operate in a particular market structure. That is, managers should spe-
cialize in managing either a perfectly competitive, monopoly, monopolistically competi-
tive, or oligopoly firm.”

Every market structure generally tends to change or evolve over time. A

manager that only understand a particular strategy for a certain market structure means
that they don’t really understand each element that defines the market as it is. A good
manager understands those element throughly and are able to adapt based on the
changing elements, that could potentially changes the market structure itselfs. For
example , the number of competitors, when competitors arise, means that the market
strips away further from a monopoly, while when competitors decrease, the market
move closer to a monopoly. To survive in the market, managers shouldn’t use a
standarlized strategy, rather they should analyze all the over-changing elements such as
demands, price in the market, new competitors, substitutes, etc and make an evolving
strategy around those elements. They must be able to adapt, or else they’ll lose and be
left behind.
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6. Under what conditions might the Justice Department approve a merger between two
companies that operate in an industry with a premerger Herfindahl-Hirschman index of
2,900 if the postmerger index is expected to increase by 225?

With an HHI index over 1800 (pre-merger), we can see that the Industry
concentration is high, which meanst that the market are controlled by a small number
of firms ( usually big firms). And that the justice department policy stated that
postmerger HHI shouldn’t be more than 100, since it has a potential of harming the
customers in the market by pricing control by the joint firms. The guidelines stated that
horizontal merger that has a purpose of caputuring more market power rather than a
reduction of cost should often be avoided. But,these are just guideliens, and there are
cases where this will be allowed, which are:
 The absence of evidence that a merger is likely to harm consumer
 Evidence that the merger would not make it hard for new firms to enter
the market ( barriers of entry doesn’t change)
 Evidence of significant foreign competition ( they would want to prioritize
the local firms)
 An emerging new technology ( increase efficiency)
 Increased efficiency ( more supply in the market, and cost reductions(
 when one of the firms has financial problems
but even then, there are still guidelines that the joint firms should not by any means
change the business environment to a worst case, for instance they cannot do things
like pricing control that can make new competitors or new firms have a hard time
competing in the market than they should be. And that there wouldn’t be a negative
impact on the customer in the event of the merging.
.

7. Based only on the knowledge that the premerger market share of two firms proposing to
merge was 30 percent each, an economist working for the Justice Department was able to
determine that, if approved, the postmerger HHI would increase by 1,800. How was the
economist able to draw this conclusion without knowledge of the other firms’ market
shares? From this information, can you devise a general rule explaining how the
Herfindahl-Hirschman index is affected when exactly two firms in the market merge?
(Hint: Compare a2 + b2 with [a + b]2.)

S 1 2 S2 2 S 2 S 2 S 2

Pre-merger: HHI = 10,000

[( ) ( ) ( ) ( ) ( ) ]
St
+
St
+…+ i + i +1 + n
St St St
S 1 2 S2 2 S i+ S i+1 2 Sn 2

Post-merger: HHI = 10,000

St[( ) ( ) ( ) ( ) ]
+
St
+…+
St
+
St
Difference between Post-merger and pre-merger HHI=
 ERIC STEVANUS 2201756600 LA28
S 1 2 S2 2 S +S 2 S 2
S 1 2 S2 2 S 2 S 2 S 2

10,000
[( ) ( ) ( ) ( ) ] [( ) ( ) ( ) ( ) ( ) ]
St
+
St
+…+ i i+1 + n
St St
- 10,000
St
+
St
+…+ i + i +1 + n
St St St

S i +S i+1 2 Si 2 S i+1 2

10,000
[( ) ( ) ( ) ]
St
−
St
−
St
Si 2 2 S i Si +1 Si +1 2 S i 2 Si +1 2

10,000
[( ) ( ) ( ) ( ) ]
St
+
s2t
+
St
−
St
−
St

2 S i Si +1
= 10,000 ( s2t )
Si/St = 30%

= 10,000 * 2 * 0.3 * 0.3 = 1,800

This means that when two exact firms with same market share merge, the HHI increase
formula would always be:
10.000 ×2 × Market share 2 or 2 0.000 × Market share 2
and that in the event of a market HHI of 1800 above ( market with high concentration), the
maximum market share joint from both of these same firms, is 7% ( since the guidelines stated
that HHI should change by more than 100)

8. Consider a firm that operates in a market that competes aggressively in prices. Due to the
high fixed cost of obtaining the technology associated with entering this market, only a
limited number of other firms exist. Furthermore, over 70 percent of the products sold in
this market are protected by patents for the next eight years. Does this industry conform
to an economist’s definition of a perfectly competitive market?

No, because in a perfect competition, there are a lot of competitors, and low barrier
of entry. Since the the barrier of entry stated in the questions is high, it doesn’t belong to a
perfect competition market. and also ,the products that are being sold has patent, which
means that these are heterogenic product (slightly different product, not homogenic). The
stated market are best describe as an oligopoly market. example of realy life industry that
has a close description as the one stated above is the airline industry.
.

9. Based on the information given, indicate whether the following industry is best
characterized by the model of perfect competition, monopoly, monopolistic competition,
or oligopoly.
ERIC STEVANUS 2201756600 LA28
a. Industry A has a four-firm concentration ratio of 0.005 percent and a
Herfindahl-Hirschman index of 75. A representative firm has a Lerner
index of 0.45 and a Rothschild index of 0.34.

Low four-firm concentration ratio and low HHI means that the industry
concentration is low and firms distribution is high, and that there are
many firms in the market. Low Rothschild also means that the products
or services is quite similar, but not low enough to be stated as a perfect
competition. And low lerner index 0 also means that these firms has
some but not big of a market power possessed. This market is best
defined as Monopolistic Market

b. Industry B has a four-firm concentration ratio of 0.0001 percent and

Herfindahl-Hirschman index of 55. A representative firm has a Lerner
index of 0.0034 and Rothschild index of 0.00023.

Very low Four-firm concentration and low HHI index means that there are
many firms in the industry, and since the four firm concentration ratio is
really low, means that there dont have any market power. A very low
lerner index that are very close to 0 also confirms that they don’t have
any market power and quite susceptible to a price war, and very low
Rothschild index that are close to 0 indicate that the products are very
similar throughout the industry. This industry are best describe as a
perfect competition

c. Industry C has a four-firm concentration ratio of 100 percent and

Herfindahl- Hirschman index of 10,000. A representative firm has a
Lerner index of 0.4 and Rothschild index of 1.0.

Both Four-firm concentration ratio and HHI score the highest possible
number, which means that there are only one firm in the market.
rothschild index of 1 also means that the demand elasticity for the firm’s
product are the same as the market’s demand elasticity. It’s clear that
this is a monopoly market. the lerner index of 0.4 suggest that there are
limitation placed by the government to protect the consumer.

d. Industry D has a four-firm concentration ratio of 100 percent and

Herfindahl- Hirschman index of 5,573. A representative firm has a Lerner
index equal to 0.43 and Rothschild index of 0.76.

Four-firm concentration scores the highest possible number, but the HHI
are still not the highest, which means that there are exactly 4 firms in the
market. High rothschild index also suggest that products in the market
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are different, and lerner index although are closer to 0, which means that
there have some but not much as market power, still wouldn’t deny the
fact that this is an olygopoly.

10. The four-firm concentration ratios for industries X and Y are 81 percent and 74 percent,
respectively, while the corresponding Herfindahl-Hirschman indexes are 3,100 and
1,600. The Dansby-Willig performance index for industry X is 0.7, while that for indus-
try Y is 0.55. Based on this information, which would lead to the greater increase in
social welfare: a slight increase in industry X’s output or a slight increase in industry Y’s
output?

The four-firm concentration ratios for X = 81% HHI X =3,100 Dansby-willig X = 0.7
Industry X has a high concentrations which means that there are few large companies
controlling the market, and that the market structure are best define as an oligopoly.

The four-firm concentration ratios Y = 74% HHI Y =1,600 Dansby-willig Y = 0.55

Industry Y also has large companies controlling the market, but the market distribution
is also high, meaning that there are also a large number of small firms operating in the
market. this market are also best define as an olygopoly, but with small firms that
produce lesser goods that are still able to find their way into the market.

Since the Dansby-Willig performance index for Industry X is higher than Y, this
means that a alter in output on industry X, would lead to a greater increase in social welfare
than in industry Y. But this also means that Industry Y has better performance than X. And that
also explain why there are many small firms operating in Y.