Question

In 2006, the five leading suppliers of digital cameras in the United States were: Canon, Sony, Kodak, Olympus, and Samsung. The combined market share of these five firms was 60.9 percent. The leading firm was Canon, with a market share of 18.7 percent. The own-price elasticity for Canon’s cameras was -4.0 and the market elasticity of demand was -1.6. Suppose that in 2006, the average retail price of a Canon digital camera was $240 and that Canon’s marginal cost was $180 per camera.

Please answer the following questions:

1. Is the market for digital cameras concentrated?
2. What is the Rothschild index for Cannon? How would you interpret the Rothschild index you get?
3. What is the Lerner index for Cannon? How would you interpret the Lerner index you get?
4. Based on the information given in Question 1-3, what type of market structures (Perfect competition, Monopoly, monopolistic competition, or oligopoly) does these suggest? Why?

Answer 1

Ans).

1) RothchildIndex: To calculate the Rothschild index we need to use this formula,

Rothschild Index = (Price Elasticity of Market Demand / Own Price Elasticity of Demand)

Here, the price elasticity of demand itself is - 4.0 and the market price elasticity of demand is - 1.6.

Thus, Rothschild index = (- 1.6) / (- 4)

Rothschild index = 0.4.

2) Rothschild Index is the measures of
elasticity of industry demand for a product
relative to that of an individual firm.
The Rothschild Index vary between 0 - 1

3) For calculation of lerner index the formula used is as follows

Lerner index = [(P - MC) / P]

the price of a Canon digital camera was $ 240 and Canon's marginal cost was $ 180,

Thus , the Canon Lerner index = ($ 240 - $ 180) / $ 240

Canon's Lerner index = 0.25.

A measure of the difference between price and marginal cost as a fraction of the product’s
price. Firm has no market power
Lerner index ranges from 0-1, when P=MC, index will be zero, when the index is close to 1 it indicates weak price indication, firm has market power.

4). Type of market structure is oligopoly, because as it is easily observed the value of L>0.