Question

Please answer all questions, show all calculations.

Suppose an industry is composed of six firms. Four firms have sales of $100,000 each, and two firms have sales of $50,000 each.

a. Explain how concentration ratios are calculated. Determine the concentration ratios in the market.
b. Explain how the Herfindahl-Hirschmann index is constructed. Determine the Hefindahl-Hirschmann index for that industry.
c. Based on the FTC and DOJ Horizontal Merger guidelines, do you think that the FTC would attempt to block a horizontal merger between two firms with sales of $100,000 and $50,000? Explain.
d. Explain how the FTC decides on whether to challenge a proposed merger? What other aspects does the agency consider in addition to the HHI and market concentration ratios? Use the link below to prepare your answers.

http://www.ftc.gov/reports/ethanol/2007ethanol.pdf

Answer 1

Answer:-

1.     The concentration ratio, in economics, is a ratio that indicates the relative size of firms in relation to their industry as a whole. Low concentration ratio in an industry would indicate greater competition among the firms in that industry than one with a ratio nearing 100%, which would be evident in an industry characterized by a true monopoly.

The 4 firm concentration ratio is calculated as the sum of the market share of 4 firms with largest market share.

In the question given,

Total industry sales = 100,000*4+50,000*2=$500,000

Since the first four firms have the largest sales

Market share (%) of each of the largest four firms= 100,000/500,000=20% each

Therefore concentration ratio=20%+20%+20%+20%=80%

2) Herfindahl-Hirschmann index is calculated as a sum of a market share of each firm in the industry.

         Herfindahl-hirschmann index =∑(market share)²

          Market share of first four firms = 20% each

          Market share of last two firms = 50,000/500,000=10%

          Herfindahl-hirschmann index=(20²)*4+(10²)*2=1800.

3). If two firms with $100,000 and $50000 sales merge,their market share =150,000/500,000=30%

          Herfindahl-Hirschman index=(30²)+(20²)*3+(10²)=2200

          Since the original index value was 1800 and due to the merger the change in a value of the index is more than 50, therefore FTC may suspect potential concentration of market share and may try to block the merger.

4). Federal Trade Commission (“Commission” or “FTC”) performs a market concentration analysis using the Herfindahl-Hirschman Index to determine whether there is sufficient competition among industry participants to avoid price-setting and other anticompetitive behavior. The statute further requires that the FTC consider all marketing arrangements among industry participants in preparing its analysis. The FTC must report its findings to Congress and to the Administrator of the Environmental Protection Agency by December 1 of each year.

While HHIs provide information about market concentration, they are only the starting point for the competitive analysis undertaken by the Commission and the U.S. Department of Justice. Both agencies make their enforcement decisions based on several factors in addition to HHIs, such as ease of entry and competitive effects.