Identifying Market Structures Flashcards
Challenge Questions
The U.S. telecommunications industry, dominated by firms like AT&T, Verizon, and T-Mobile, operates in an oligopolistic market structure characterized by high barriers to entry and significant market interdependence. Suppose AT&T proposes a merger with T-Mobile to increase its market share, which would significantly alter the industry landscape. Before the merger, AT&T holds 35% of the market, Verizon 40%, and T-Mobile 20%, with smaller players holding the remaining 5%. How would the Herfindahl-Hirschman Index (HHI) and the N-firm concentration ratio change post-merger, and what does this imply about market power?
A. The HHI would increase by 400 points, and the N-firm concentration ratio would increase by 20 percentage points, suggesting a significant increase in market power.
B. The HHI would increase by 1,000 points, and the N-firm concentration ratio would increase by 10 percentage points, indicating a substantial rise in market concentration and regulatory concern.
C. The HHI would increase by 1,600 points, and the N-firm concentration ratio would increase by 15 percentage points, implying a drastic increase in market power and possible regulatory intervention.
D. The HHI would increase by 500 points, and the N-firm concentration ratio would remain unchanged, showing that the merger has little impact on market power.
C. The telecommunications industry is an oligopoly. The HHI increases significantly when market shares of large firms are combined due to the squaring of market shares, indicating a drastic rise in concentration and market power, which often leads to regulatory scrutiny.
Explanation:
Before the merger, the HHI = (0.35)^2 + (0.40)^2 + (0.20)^2 + (0.05)^2 = 0.2925 or 2,925. Post-merger, the new HHI = (0.55)^2 + (0.40)^2 + (0.05)^2 = 0.4525 or 4,525. The increase is 0.4525 - 0.2925 = 0.16 or 1,600 points. The N-firm concentration ratio goes from 95% to 100%, a 5 percentage point increase.
The global beverage market, particularly the soft drinks segment, operates as an oligopoly dominated by Coca-Cola, PepsiCo, and Dr Pepper. Given the following market shares: Coca-Cola (50%), PepsiCo (30%), Dr Pepper (15%), and smaller firms (5%), calculate the HHI and discuss the implications if Coca-Cola and PepsiCo were to merge.
A. The HHI before the merger is 3,500, and it would increase by 2,000 points post-merger, leading to a highly concentrated market likely facing antitrust challenges.
B. The HHI before the merger is 3,750, and it would increase by 2,500 points, suggesting an almost monopolistic market and definite regulatory intervention.
C. The HHI before the merger is 4,250, and it would increase by 1,800 points, signaling a highly concentrated market where competitive pressures are severely reduced.
D. The HHI before the merger is 4,100, and it would remain unchanged, indicating that even with the merger, market concentration does not increase significantly.
A. The soft drink market operates as an oligopoly. The HHI before the merger is calculated as (0.50)^2 + (0.30)^2 + (0.15)^2 + (0.05)^2 = 3,500. Post-merger, the HHI becomes significantly higher, indicating a highly concentrated market and potential regulatory challenges.
Explanation:
After the merger, the new HHI = (0.80)^2 + (0.15)^2 + (0.05)^2 = 5,500. The increase is 2,000 points, showing the merger would likely face antitrust scrutiny due to the extreme market concentration.
Suppose the European smartphone market is dominated by Apple (45%), Samsung (35%), and Xiaomi (10%), with smaller brands making up the rest. What would be the market structure of this industry, and how does the current concentration affect competition according to the N-firm concentration ratio and HHI?
A. The industry is best described as an oligopoly with a high concentration, as indicated by an HHI of 3,650 and N-firm concentration ratio of 90%, suggesting moderate pricing power and significant interdependence among firms.
B. The market functions as a monopolistic competition structure with high product differentiation and moderate pricing power due to an HHI of 2,200 and a concentration ratio of 80%.
C. The market is an oligopoly with very high concentration, reflected in an HHI of 3,500 and a concentration ratio of 90%, allowing substantial pricing power and strategic behavior among dominant firms.
D. The market is a near-monopoly with Apple dominating, as shown by an HHI above 4,000, which suggests a significant potential for regulatory intervention.
C. The smartphone market operates as an oligopoly, characterized by high concentration (HHI = 3,500) and significant market share among a few firms, leading to high interdependence and pricing power.
Explanation: The HHI calculation is (0.45)^2 + (0.35)^2 + (0.10)^2 + (0.10)^2 = 3,500. The N-firm concentration ratio is 90%. This concentration suggests a few firms have substantial pricing influence, which is typical of an oligopoly.
In the U.S. retail pharmacy market, CVS, Walgreens, and Rite Aid dominate, holding market shares of 40%, 35%, and 15%, respectively. If CVS proposes acquiring Rite Aid, what would be the expected change in market concentration, and how might regulators respond based on HHI calculations?
A. The pre-merger HHI is 3,200, and it would increase by 1,500 points to 4,700 post-merger, leading regulators to likely block the merger due to excessive market concentration.
B. The pre-merger HHI is 3,100, increasing by 500 points post-merger to 3,600, which would likely pass regulatory scrutiny as concentration remains within acceptable bounds.
C. The pre-merger HHI is 3,450, increasing to 4,050, reflecting moderate concerns but unlikely to trigger severe regulatory intervention due to remaining competitive dynamics.
D. The pre-merger HHI is 3,000, with no significant change post-merger, suggesting minimal impact on overall market structure and likely approval from regulators.
A. The retail pharmacy market is an oligopoly. The HHI significantly increases post-merger, indicating a highly concentrated market that would face substantial regulatory scrutiny.
Explanation: The pre-merger HHI = (0.40)^2 + (0.35)^2 + (0.15)^2 + (0.10)^2 = 3,200. Post-merger, it becomes (0.55)^2 + (0.35)^2 + (0.10)^2 = 4,700, a 1,500-point increase, suggesting the merger would significantly alter market power and likely face opposition from regulators.
The European luxury automobile market consists primarily of BMW (30%), Mercedes-Benz (25%), Audi (20%), and Porsche (10%), with smaller brands holding the rest. If BMW and Audi were to merge, calculate the impact on market concentration using the HHI and discuss the potential competitive implications.
A. The HHI pre-merger is 2,350, increasing by 950 points post-merger to 3,300, creating a dominant firm scenario with lessened competition and significant regulatory concerns.
B. The HHI pre-merger is 2,500, increasing to 3,100, signaling a shift towards monopolistic dominance but likely not triggering regulatory action.
C. The HHI pre-merger is 2,400, increasing by 600 points post-merger to 3,000, indicating moderate increases in concentration that may prompt regulatory review but not immediate action.
D. The HHI pre-merger is 2,600, increasing by 1,000 points to 3,600, showing a drastic shift toward oligopoly dominance and probable regulatory intervention.
A. The luxury automobile market operates as an oligopoly. The HHI before the merger indicates moderate concentration, but a significant post-merger increase would likely trigger regulatory intervention due to the substantial rise in market power.
Explanation: Pre-merger HHI = (0.30)^2 + (0.25)^2 + (0.20)^2 + (0.10)^2 = 2,350. Post-merger HHI = (0.50)^2 + (0.25)^2 + (0.10)^2 = 3,300. The 950-point increase indicates a move towards dominance, raising significant competition and regulatory concerns.
