Please answer the 4 questions below. Suppose an industry that has 10 firms. Belo
ID: 1225947 • Letter: P
Question
Please answer the 4 questions below.
Suppose an industry that has 10 firms. Below are the market shares for 2008 and 2013 of the 10 firms.
Market Share
Firms
2008
2013
A
B
C
D
E
F
G
H
I
G
26%
21%
16%
10%
9%
7%
4%
3%
2%
2%
22%
23%
19%
9%
8%
7%
6%
4%
1%
1%
1. Calculate the concentration ratio CR4 and the concentration ratio CR8 for 2008 and 2013
2. Calculate the Herfindahl-Hirschmann Index (HHI) for 2008 and 2013
3. Using the CR4, CR8, and HHI, analyze the evolution of the seller concentration in the industry. Has the industry become more or less concentrated?
4. Using the CR4, CR8, and HHI, analyze the evolution of the potential market power of firms in the industry.
Market Share
Firms
2008
2013
A
B
C
D
E
F
G
H
I
G
26%
21%
16%
10%
9%
7%
4%
3%
2%
2%
22%
23%
19%
9%
8%
7%
6%
4%
1%
1%
Explanation / Answer
1. Concentration ratio CR4 = sum of top 4 market shares
So,
Concentration ratio CR4 for 2008 = 26% + 21% + 16% + 10% = 73%
Concentration ratio CR4 for 2013 = 23% + 22% + 19% + 9% = 73%
Concentration ratio CR8 for 2008 = 26% + 21% + 16% + 10% + 9% + 7% + 4% + 3% = 96%
Concentration ratio CR8 for 2013 = 23% + 22% + 19% + 9% + 8% + 7% + 6% + 4% = 98%.
2.
HHI = sum of (market share)2 of ith firm, where i = 1,....,n
Herfindahl-Hirschmann Index (HHI) for 2008 = 262% + 212% + 162% + 102% + 92% + 72% + 42% + 32% + 22% + 22% = 10000
Herfindahl-Hirschmann Index (HHI) for 2013 = 232% + 222% + 192% + 92% + 82% + 72% + 62% + 42% + 12% + 12% = 10000
3. CR is ranged from 0% to 100% and HHI is ranged from 0 to 10000.
As we know the large the amount of CR the lower the market concentration is and similarly the larger the value of HHI the lower the concentration level is. So in this case the market is less concentrated.
4. From the previous analysis we can say that there is monopoly power in the market.
Please mention the number of firm for which HHI has to be calculated.