Question

1. The top four cigarette manufactures in the U.S. are Altria, BAT, Imperial, and Liggett. Their marketing shares are 68%, 22%, 5%, 2%, respectively. All other companies together have 3% of the market share.
   1. Calculate CR4 and HHI for the cigarette market in the U.S.
   2. Based on your answer to a), how would you characterize the market structure of the cigarette market in the U.S. Can you infer cigarette pricing and quantity decisions made by these firms based on the market structure. If so, what are they? If not, can you explain what additional information you need.

Answer 1

Concentration ratio - it is calculated by adding the market share percentage of large number of firms , if the top 4 firms account for more then 60% then it is said to be OLIGOPOLY , Therefore, The concentration ratio is 97% ( 68+ 22+5+2) ,

HHI =10000x (0.68^2+0.22^2+0.05^2+0.02^2)

= 0.4624+0.0484+0.0025+0.0004 x 10000

=5137

As HHI > 2500 thus , market is highly concentrated

ANS a on the basis of above ratios the market structure is said to be OLIGOPOLY

ANS B . High level of concentration have major impacts on pricing , market entry and competition.

1. PRICING-  The higher market concentration shows that the firms are earnings higher profit by charging higher prices , although they engage in anti - competitive pricing practices like collusive pricing, predatory price cutting and price discrimination where they Reduce price to more price sensitive consumer like young adults or lower income people. They have used to support lobbying, lawsuits and other activities for pricing strategies.

2. Output decision- as the Market is said to be highly concentrated then the substantial part of output is sold by them. They create entry barriers by advertising, brand profileration (where people prefer to use particular brands) , and slotting allowance contract, which were engaged by government regulations, they somewhat have understanding of output decision and as Altria holding 68% of market share, it can be said that he has large control over the output sold.