Question

Market shares in the U.S. cigarette industry are as follows.

Cigarette Company	Market Share (Percent)
Altria	50
Reynolds	35
Vector	5
Republic	4
three smallest companies	each 2
Total	100

1. 1. Define the four-firm concentration ratio of an industry. Compute the four-firm concentration ratio for the cigarette industry. Show your computation.

2. Define the Herfindahl-Hirschman index (HHI). Compute the HHI for the cigarette industry. Show your computation.

3. The cigarette industry is often described as a “duopoly.” Explain how this description makes sense, even though there are more than two firms in the industry.

4. According to the U.S, government, what is the classification of the cigarette industry in terms of “concentration”? Explain your answer.

5. (a) Suppose that Altria and Reynolds explore a merger of the two companies. Is this merger likely to be approved by the U.S. government? Explain your answer using the HHI concept.

    (b) Instead of Altria and Reynolds merging, suppose that the three smallest companies decide to merge. Is this merger likely to be approved by the U.S. government? Explain your answer using the HHI concept.

Answer 1

1. Four firm concentration ratio of an industry is the market share of the of the first top four firms of an industry. The four firm concentration ratio of cigarette industry will be the addition of market share of first top four firms. Here the market share of top four firms is 50+35+5+4=94. Therefore we can say market for cigarette is highly concentrated. Anything above 80% is considered as highly concentrated.

2. HHI is an index which measures market concentration of an industry. A highly concentrated market imply few firms control the total market of the industry. It actually gives the idea of potential impact of acquisitions and mergers of an industry. HHI of cigarette industry is the square of market share of each company. Here HH index is 50^2 + 35^2 + 5^2 + 4^2 + 2^2 + 2^2 + 2^2 = 3771. The value of HH index varies from 0 to 10000. If one monopoly firm has 100% market share then the value of HH index will be 10000. For perfect competitive market it will be 0.

3. Though there are more than two firms but the market share of first two company is 85 percent. If concentration ratio goes beyond 80% it will be highly concentrated and market is totally concentrated on these two company. It is more or less existence of two firms. As this market share of two companies are really higher others so it is look like there is two companies exist in the industry.

4. In US cigarette industry are mainly highly concentrated. Because the first two firms majorly concentrate most of the market. It is classified as highly concentrate , medium concentrate, and low concentrate.