Suppose an industry that has 10 firms. Below are the market shares for 2008 and

Question

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%

Calculate the concentration ratio CR4 and the concentration ratio CR8 for 2008 and 2013

(5 points)

Calculate the Herfindahl-Hirschmann Index (HHI) for 2008 and 2013 (5 points)

Using the CR4, CR8, and HHI, analyze the evolution of the seller concentration in the industry. Has the industry become more or less concentrated? (10 points)

Using the CR4, CR8, and HHI, analyze the evolution of the potential market power of firms in the industry. (10 points)

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)

CR4 = % share of top 4 firms

2008: (26 + 21 + 16 + 10)% = 73% = 0.73

2013: (22 + 23 + 19 + 9)% = 73% = 0.73

CR8 = % share of top 8 firms

2008: (26 + 21 + 16 + 10 + 9 + 7 + 4 + 3)% = 96% = 0.96

2013: (22 + 23 + 19 + 9 + 8 + 7 + 6 + 4)% = 98% = 0.98

(2) HHI = Sum of square of % share of all firms

2008: (26)2 + (21)2 + (16)2 + (10)2 + (9)2 + (7)2 + (4)2 + (3)2 + (2)2 + (2)2 = 676 + 441 + 100 + 81 + 49 + 16 + 9 + 4 + 4 = 1,380

2013: (22)2 + (23)2 + (19)2 + (9)2 + (8)2 + (7)2 + (6)2 + (4)2 + (1)2 + (1)2 = 484 + 529 + 361 + 81 + 64 + 49 + 36 + 16 + 1 + 1 = 1,622

(3)

While the C4 ration has remained unchanged, signifying the top 4 firms retaining their total market share, C8 has increased by 2%, indicating higher concentration of market share of 5th, 6th, 7th and 8th firms. However, HHI has experienced a noticeable increase from 2008 to 2013, which clearly indicates the market getting more fragmented with higher competitive forces setting in.

(4)

If the same pattern continues beyond 2013, we can expect the 4 largest firms slowly lose their market shares over the new entrants in the market, as more and more firms start entering in the future.

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