The widget industry is comprised of six firms of varying sizes. Firm 1 has 35 pe
ID: 1123949 • Letter: T
Question
The widget industry is comprised of six firms of varying sizes. Firm 1 has 35 percent of the market. Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the Herfindahl-Hirschman index for the widget industry? Based on the U.S. Department of Justice merger guidelines described in the text, do you think the Justice Department would be likely to block a merger between firms 5 and 6?
Yes, it is likely to block the merger because the HHI is already greater
b) Grocery stores make most of their profits on soft drinks, beer, chips, and candy. A casual look at prices of these items reveals that these prices change extremely often and can vary as much as 50 percent. Is this because the wholesale price of these items fluctuates this dramatically, or is there some other possible explanation?
c) The U.S. Postal Service has been raising postal rates on a regular basis. The service had been losing money. One of the reasons is increased competition from companies such as United Parcel Service and Federal Express. Another reason is the use of faxes and e-mail, as well as electronic bill payment. With this decrease in demand for postal services, why do you think that the Postal Service is seeking a rate increase?
Explanation / Answer
a) Herfindahl-Hirschman index = 352+252+102+102+102+102 = 2250.
After the merger the HHI increases to 352+252+102+102+202 = 2,450. The merger is likely to be challenged because:
(i) the original HHI 2250 is greater than that in the Guidelines 1800.
(ii) the new HHI increases by 200, which is greater than that in theGuidelines 100.
b) The frequent variation in prices on soft drinks, beer, chips, and candy is because grocery stores' managers are engaging in randomized pricing to keep their rivals from being able to know what price to charge to steal their customers and not due to the fluctuation in the wholesale price of these items.
c) Postal Service is seeking a rate increase because the decreased mail volume does not lead to a correspondingly large reduction in costs because of the loss of economies of scale as the fixed costs needs to be maintained.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.