In the 1990s, five firms supplied amateur color film in the United States: Kodak
ID: 1230310 • Letter: I
Question
In the 1990s, five firms supplied amateur color film in the United States: Kodak, Fuji, Konica, Agfa, and 3M. From a technical viewpoint, there was little difference in the quality of color film produced by these firms, yet Kodak’s market share was 67 percent. The own price elasticity of demand for Kodak film was -2.0 and the market elasticity of demand was -1.75. Suppose that in the 1990s, the average retail price of a roll of Kodak film was $6.95 and that Kodak’s marginal cost was $3.475 per roll. Based on this information, discuss industry concentration, demand and market conditions, and the pricing behavior of Kodak in the 1990s. Do you think the industry environment is significantly different today? Explain.
Explanation / Answer
The four-firm concentration ratios for industries X and Y are 89 percent and 62 percent, respectively. For concentration ratio: A market having 0% concentration ratio means that the four largest firms in the industry is not having significant market share. And 100% means that the four largest firms in the industry are having significant market share. A concentration ratio of 89% meant that the four largest firms have a significant share and it is nearly equal to a monopoly market (for concentration ratio 80% to 100% market is oligopoly to monopoly). For 62% the industry is also a concentrated one, but here the type of market is oligopoly. Note: 4 Firm concentration ratios: No concentration: 0% means perfect competition or at the very least monopolistic competition. If for example CR4=0 %, the four largest firm in the industry would not have any significant market share. Total concentration 100% means an extremely concentrated oligopoly. If for example CR1= 100%, there is a monopoly. Low concentration 0% to 50%. This category ranges from perfect competition to oligopoly. Medium concentration 50% to 80%. An industry in this range is likely an oligopoly. High concentration 80% to 100%. This category ranges from oligopoly to monopoly A HHI index below 0.01 (or 100) indicates a highly competitive market. A HHI index below 0.15 (or 1,500) indicates an unconcentrated market. A HHI index between 0.15 to 0.25 (or 1,500 to 2,500) indicates moderate concentration. A HHI index above 0.25 (above 2,500) indicates high concentration For the first market (industry X) Herfindahl-Hirschman indexes are 2,600 which mean that there is high concentration and monopoly power exists. For HH 1,200(Industry Y) the market is unconcentrated. As the industry X is highly concentrated or monopoly power exists, if a slight increase of output in this market reduces the price of output and increases the welfare of the market. Having 67% market share means that there is substantial amount of market power. Though the market structure is an Oligopoly Kodak enjoys a monopoly power. There are only 4 major firms supplying the product and the demand is huge. The output supplied is lower compared to the market demand. The product price which is above the marginal cost incurred reduces the welfare of the consumer and there is allocative inefficiency of resources. Today these color films don’t exist, but these firms compete in digital photo domain. But as there are many firms competing and the advancement in technology the market for digital photography is competitive today.