Market Structure

Question 1

What are the aspects of the definition of a substitute?

Answer 1

Performance, Occasion of use, and geographic are

Question 2

Aspects of market definition?

Answer 2

Geography & and product (apply high cross price elasticity of demand)==> competitive constraints.

Question 3

demand price elasticity formula and interpretation

Answer 3

e x,y =%change in Q.x/ %change in Py = (Py/Px)*(ep.Qx/ep.Qy)

if e x,y= 2% ==> %Dpx=-1% ==> a change of 1% in price implies a 2% decrease in Q.

Question 4

Relevant Market

Answer 4

• *The relevant market for one product includes all products that significantly limit the price of this product.
• *The extent to which firms are able to increase their prices above normal competition levels depends on the possibility for consumers to buy substitute goods.
• *The fewer the substitute products the less elastic the demand curve is and the more probable is to find higher prices.

Question 5

Anti-trust agencies == what for?

Answer 5

Antitrust agencies are responsible for preventing anticompetitive conduct.
􏰀 U.S. Department of Justice (DOJ)
􏰀 European Commission (DG Competition)

Question 6

DOJ stands for?

Answer 6

U.S. Department of Justice
It has developed a conceptual guide for market definition: The SSNIP test: Small but Significant Nontransitory Increase in Price.
“Small” is usually more than 5% , “non transitory” is usually less than a year

Question 7

Ck - concentration Index
Formula ?
pros?
cons?

Answer 7

Ck= sum of market shares of K firms included.
Pros: easy to compute
Cons: depends on the choice of firms included

Question 8

Herfindhal-Hirschmn Index
Formula
Pros ?
Cons?

Answer 8

HHI= 10K+ sum(m.shares^2)
Pros: 
*usually is enough to include all mkt firms with a share greater than 1%
*Sensitive to market share changes 
Cons: Requires more data than Ck.

Question 9

HHI ranges for US

Answer 9

• Low concentration: HHI<1500
• Moderate 1500-2500; a change greater than 100 will potentially raise* significant competitive concerns and often warrant scrutiny.
• High concentration: HHI>2500 if the merger involves an increase in HHI between 100 points and 200 points , it would potentially raise significant competitive concerns. If the HHI increases more than 200 points, it will be presumed to enhance market power and is likely to be investigated.
• Small changes in DHHI <100 , In general, mergers involving an increase in the HHI below 100 points are unlikely to have adverse competitive effects and ordinarily require no further analysis.

Question 10

HHI ranges for EU

Answer 10

• Low concentration: HHI<1000
• Moderate 1000-2000; a change below 250 is a no concern except in spe. circumstances

*High concentration: HHI>2000; no concerns if the merger involves an increase in HHI below 150 except in spe. circumstances

• *Special Circumstances:
• merger involves a potential entrant or a recent entrant with a small market share;
• One or more merging parties are important innovators in ways not reflected in market shares;
• significant cross-shareholdings among the market participants;
• one of the merging firms is a maverick firm with high likelihood of disrupting coordinated conduct;
• Indication of past or ongoing coordination practices, are present;
• One of the merging parties has a pre-merger market share of 50% or more

Question 11

Market dynamics highlighted

Answer 11

• New entries ceased by mid 90s
• Before 2000, 20% of the exists were to merge
• Post 2000, 100% of the exits are towards a merger

Question 12

Concentration Measures Limitations

Answer 12

• Market Definition Scope: In general statistics are at the national level, instead of national or regional
• Global Market : concentrations are overstated as they exclude imports
• Static measures: C. measures give a time snapshot on the concentration, considering diff snaps at different times may be beneficial as it provides more info and context

Question 13

Standard Industry Classification

Answer 13

*Collects and analyses info in 4 digits industries
* in EU is done by CPA Classification of Products by Activity (EUROSTAT)
* SIC classifications in general do not correspond to the economic market definition: categories can be too broad or to narrow for a given relevant product market.
*Too Broad Definition:
3721- Aircraft and Aircraft Parts: includes airplanes, hang-glider, blimps (looks like a Zeppelin), helicopters
2834 􏱫 Pharmaceutical Preparations: includes prescription drugs, over-the-counter preparations and veterinary products
* Too Narrow Definition:
3221 􏱫 Glass Containers; 3411 􏱫 Metal Cans

Question 14

SIC market definition Broad vs. Narrow

Answer 14

• If it is too broad: measured degree of concentration is underestimated
• If it is too narrow: measured degree of concentration is overestimated

Question 15

Economies of Scale and Concentration

Answer 15

• Industries with large minimum efficient scales compared to the size of the market tend to have high concentration
• The inter-industry pattern of concentration is replicated across countries
• When production enjoys economies of scale, entry is difficult and hence profits are high

Question 16

Price-Cost Margins and Concentration

Answer 16

• Theory would predict that price-cost margins will be higher in industries with greater concentration (fewer sellers)
• There could be other reasons for inter- industry variation in price-cost margins (regulation, concentration of buyers and so on)