IO Tools; Market Power Indices Flashcards
What are the sources of economies of scale?
High fixed costs
Increased Productivity of variable inputs
Low inventory costs
How many firms are included within the HHI equation?
The top 50 firms with the highest market shares in that market
The Lerner Index takes values between…
0-1 (%)
How do you calculate the Lerner Index?
(P - MC(Q)) / P
What are the characteristics of vertical limits for firms?
- Gives rise to “make or buy” decisions
- Might be affected by transaction costs
- Shows the activities that a firm performs relative to the activities it outsources
What are economies of scope?
The production of 2 or more goods decreases the average total cost
What is the benefit of having a patent
It always is a source of competitive advantage
The Herfindahl-Hirschman Index takes values between…
0 - 10,000
What does the Lerner Index measure?
A firm’s market power
What are the 2 market power indices?
Herfindahl-Hirschman Index and Lerner Index
If a firm’s Lerner Index is 0, then…
The firm is a price taker
What happens when a new firm enters a market?
The profits of existing firms in the market will reduce
What does the Herfindahl-Hirschman Index measure?
The market concentration based on a firms’ market shares
What does it mean when there is a higher HHI?
There is more concentration, the more market control
What happens if a firm has an HHI of 10,000?
It means the firm is a monopoly
