Question

Refer to the section “The Prevalence of Oligopoly” and review the formula for Herfindahl-Hirschman Index of HHI.

Assume an industry consists of six firms with the following market share:

Firm                  Market Share (%)

A                                 12

B                                 24

C                                 14

D                                 22

E                                  20

F                                  8

Calculate HHI. How would this industry be characterized by the Justice Department guidelines?

For each of the following situations, decide whether advertising is directly informative about the product or simply an indirect signal of its quality. Explain your reasoning.

1. Football great Peyton Manning drives a Buick in a TV commercial and claims that he prefers it to any other car.
2. McDonald’s spends millions of dollars on an advertising campaign that proclaims: “I’m lovin’ it.”
3. Subway advertises one of its sandwiches by claiming that it contains 6 grams of fat and fewer than 300 calories.
4. Define public goods and private goods with particular reference to non-exclusion principle
5. Free ridership is an important issue in providing certain public goods. In your opinion, does free ridership have an impact on income distribution in our society? Explain.

Answer 1

1) HHI is calculated by squaring the market share of firms and taking the summation of squares of market shares.

Here HHI = square of 12+ square of 24 + square of 14+ square of 22+ square of 20+square of 8

=144+576+196+484+400+64

=1864

*HHI calculated comes in the range of 1500-2500, So US department of Justice must conclude that moderate concentration is present in the market.

2)

1. Advertising is indirect

( nothing is mentioned about the quality of the car. We are supposed to assume that since , a celebrity like Peyton drives it it has good quality.)

2. Advertising is indirect

( people saying l am loving it doesn't give us any information about the product. We are supposed to believe that since everyone loves it, its a good produt.)

3. Directly informative about the product.

( Here ,subway claims gives information us exact information regrading the product. It has 6 g fat and its less in calories. The advertisement will surely attract those who are concerned about health.)

2) Public goods refers to goods provided by the government for the public . These goods possess the characterics of non rivalry and non excludability.

Eg) road, bridge

Private goods are goods manufactured and sold by the private companies to satisfy consumer wants. Private goods have the characteristics of rivalry and excludability.

Eg) cloth, cosmetics

The distinction between public goods and private goods can be understood clearly by analyzing the non e excludability principle.

Public goods are non excludable before nobody is excluded from its consumption. On the other hand,private goods are attainable to only those who can pay its price. Those who can't pay it's price will be excluded from its consumption.

4) free ridership is a problem associated with the public good. Free rider problem exists when those who benefit from the resources, goods or services don't pay for them ,which results in the under provision of those goods or services.

Payrider problem has an impact on the income distribution in our society because it leads to market failure

public goods are not provided efficiently and market failure occurs when the act of free riders fail to communicate appropriate signals to allocators of resources

As a result allocative efficiently won't be attained leading further inequality in the distribution of income.