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