ECON 315 Chapter 7 - Nature of Industry
2 ways that C4 can equal 1
1. 1 very large firm 2. Firms are of equal size
Barriers to Entry
1. Government Regulations 2. Patent 3. Demand Issue 4. Resource Constraint 5. Elasticity ---> when you narrowly define a good/ market = more elastic demand (Starbucks)
Differences between HHI and C4
1. Significant 5th firm in HHI, ignored in C4 2. HHI places a greater weight on larger market shares
Limitations in HHI and C4
1. US gov calculations are based on sales of US firms ---> overestimates industry concentration 2. US gov uses only the top 50 firms in the HHI calculations
DOJ Exceptions to Mergers
1. if economies of scale 2. if economies of scope would exist 3. if one firm is facing financial difficulty, and may not survive a loan 4. if their is substantial foreign competition then a merger may occur HHI in gov only calculates domestic 5. if the market/ industry is defined to narrowly
HHI
= ((s1)^2+(s2)^2+ ... +(sn)^2) x 10,000
P
= (1/1-L) {the markup factor} x MC
C4
= (s1+s2+s3+s4)/ [ST]---> total of industry sales
Rothschild Index "R"
= ET (Elasticity for total market)/ EF (Elasticity of the firm in the market) Allows you to compare the firms elasticity with the Market Overall the closer R is to 0, the higher the elasticity for the firm vs. the industry the closer R is to 1, the closer the firms elasticity is to that of the market
L
= P- MC/ P
C4 and HHI rule
A larger value indicates a more concentrated industry
Industry Concentration Ratios
A measure of how much of industry sales are accounted for by a few firms Unconcentrated = no firms
What two entities regulate merger activity
DOJ ---> Department of Justice FTC ----> Federal Trade Commission
If it is highly concentrated, and the HHI changes between 100pts - 200pts
DOJ is likely to investigate
if the industry is moderately concentrated and the change in HHI is > 100
DOJ may investigate
if you start with a high concentration and the HHI changes > than 200pts
DOJ will investigate (and will likely oppose the merger)
Lerner Index
Indicates how much a firm marks up its price over the marginal cost
4 firm concentration ratio
Measure the sales of the top 4 firms in the industry
Herfindahl Hirschman Index
Measures the market shares (% of industry sales) of each firm expressed in decimal form, square it (each of the market shares), add up the results and multiply the sum by 10,000
Vertical Integration
Merger of 2 firms producing different parts of the same input
Horizontal Integration
Merger of 2 firms producing the same good
Industry Classification
ex: the soft drink industry ---> includes: cola, lemonade, fruit juices, root beer, birch beer, ginger ale, and iced tea
DOJ Guidelines
if HHI < 1500 - unconcentrated industry if 1500< HHI< 2500 - moderately concentrated industry if HHI > 2500 - highly concentrated industry
Scope of the Market
national vs. local C4 and HHI ---> national statistics
Conglomerate merger
similar to a horizontal merger, but the products are different ex: chewing gum, coca cola, and tobacco are all produced in house
Market Power
the ability of a firm to charge a price above the marginal cost
What are we interested in the nature of industry?
the size of the firm and their size relative to that of the industry
If the industry is moderately concentrated and the HHI changes by less than 100pts
there is no government action