G Describe the use and limitations of concentration measures in identifying market structure

Question 1

Concentration measures (indicate market power); #n firms/ Total # Sales

Answer 1

N-Firm concentration ratio, = Sum or % market shares of the largest N firms in the market;
**–does not directly measure market power or elasticity of demand; **–insensitive to mergers of two firms w/ large market shares

HHI = sum of the squares of the market shares of the largest firms in the market

Limitation to both:**– Barriers to entry are not considered *A prob. because even a firm with high market share may not have much pricing power if barriers to entry are low and there is potential competition - If a firm increases P, low barriers to entry allow other firms to push the price down. This is a case when the elas. of demand for existing firms may be high even though they have relatively high market shares and industry concentration measures.

Question 2

When examining the pricing power of firms in an industry (measure elasticity of demand directly)

Answer 2

measure elasticity of demand directly, which denotes the %change in demand per %P increase