Question

‏3. With an estimated market share of 60%, Atlas is the dominant company and the price leader in an oligopolistic steel industry. The remaining market share is distributed equally between ten companies. Suppose that one of those ten companies, Norton, attempts to gain market share by undercutting the price set by Atlas.

‏Calculate the “Four Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above described market and interpret your answer. What model can best resemble this market? Briefly explain this model. In your opinion, what will be the effect of Norton’s attempt described above on Atlas’s market share: will it increase, decrease, or not affected at all? Justify your answer

Answer 1

3. Atlas Market share=60% and Remaining firm will have 100-60=40% market share i.e. 40/10=4% each firm

CR4=Market share of top 4 firms=60+3*4=72% and HHI=60^2+10*4^2=3600+160=3760 which represents high concentration level and since we have more than one firm this represent oligopoly market.Also, since one of the firm sets price and hold the market dominance it is the Dominant Price leadership model of duopoly.

In Dominant Price leadership model of Duopoly one of the older firm dominates the market share and set prices which is often predatory and makes it difficult for the smaller firms.Other firms are generally price taker in this form of market.This is particularly common within airlines industry in US.

If Nortol lower the prices to increase its market share ,Atlas will follow the suit and since Atlas is the Dominant leader in the market it is supposed have economies of scale and efficient relative to other player leading Norton to suffer and turns unprofitable and eventually fold up in long run if it continues to hold that strategy so in Long run this will not impact Atlas's market share.