3334 Set #2 : Thursday, September 13 lem Suppose firms in the sugar processing i

Question

3334 Set #2 : Thursday, September 13 lem Suppose firms in the sugar processing industry have the following market shares: 36%, 20%, 15%, 12%, 10%, and 7%. a.Calculate CR, and H for this industry. b. If the third and fourth largest firms merge (ceteris paribus), what is the new CR, and H? c. High-fructose corn syrup is often used by food manufacturers as an alternative sweetener. 1. Suppose as the price of sugar rises by 8%, sales of high-fructose corn syrup rise by 15% what is the cross-price elasticity of demand between these goods? What does this information imply about the relevant market? Should we be more concerned or less concerned about a merger of two sugar processors given this information? Explain. Go to the US Census website and find the 2012 concentration ratios in manufacturing (value of shipments), and report the CR4 and H for the following industries: 2. a. Breakfast Cereal Manufacturing b. Breweries c. Soft Drink Manufacturing d. Optical Instruments Manufacturing e. Semiconductor and related device manufacturing In which cases might we be concerned about a merger of the top two firms creating higher prices?

Explanation / Answer

(1)

(a)

CR4 = (36 + 20 + 15 + 12)% / 100% = 83%/100% = 0.83 (= 83%)

H = (36)2 + (20)2 + (15)2 + (12)2 = 1296 + 400 + 225 + 144 = 2065

(b) New market shares are now: 36%, 27% (= 15% + 12%), 20%, 10%. So,

CR4 = (36 + 27 + 20 + 10)% / 100% = 93%/100% = 0.93 (= 93%)

H = (36)2 + (27)2 + (20)2 + (10)2 = 1296 + 729 + 400 + 100 = 2525

(c) Cross-price elasticity = % Change in sales of corn syrup / % change in price of sugar

= 15%/8% = 1.875

Since cross-price elasticity is positive, corn syrup and sugar are substitutes in production as inputs to food processing industry. Therefore, if sugar processing firms merge, their market power increases and they can increase the price of their output (i.e. sugar). Higher price of sugar will increase the demand for corn syrup and decrease the quantity demanded of sugar. Higher demand for corn syrup will increase the price of corn syrup. Therefore, in both cases, cost of input will rise for food processing industry, who will lower their supply, leading to higher price of their processed food. Therefore, we should be more concerned about such a merger.

NOTE: As per Chegg Answering Policy, first question has been answered.

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