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Market Power

Market Power. … the ability to price above marginal cost. Questions to Consider …. What is the relevant market? Will a merger increase concentration? Will merging firms retain pre-merger market shares? How contestable is the market?. 1 Measure of Market Power.

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Market Power

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  1. Market Power … the ability to price above marginal cost. COL Gutermuth - Industrial Organization

  2. Questions to Consider … • What is the relevant market? • Will a merger increase concentration? • Will merging firms retain pre-merger market shares? • How contestable is the market? COL Gutermuth - Industrial Organization

  3. 1 Measure of Market Power • Lerner Index (Price-Cost Margin) (p-MC)/p = -1/ • Firm is constrained by elasticity of demand. • MC not always easily observed. COL Gutermuth - Industrial Organization

  4. “Market Performance” • Market Performance varies with Industry Structure • Recall Structure-Conduct-Performance • Measures of Industry Concentration • Concentration Ratios • Herfindahl-Hirschman Index (HHI) COL Gutermuth - Industrial Organization

  5. Concentration Ratios • CRn = concentration ratio of “n” top firms in the industry • CR4 and CR8 mostly commonly used. • Share of industry sales accounted for by the top 4 or 8 firms. COL Gutermuth - Industrial Organization

  6. An Example • Consider 3 Industries: COL Gutermuth - Industrial Organization

  7. Concentration Ratios • CR4 • Industry A: CR4=40 • Industry B: CR4=61.75 • Industry C: CR4=80 • CR8 • Industry A: CR8=80 • Industry B: CR8=70.75 • Industry C: CR8=100 See any problems? COL Gutermuth - Industrial Organization

  8. HHI • Another Measure of Concentration si2 (sum squared market shares) • Higher HHI reflects influence of • Unequal firm sizes • Concentration of activity in a few large firms COL Gutermuth - Industrial Organization

  9. Our Example... • HHI • Industy A: = 1000 • Industry B: (55)2+20(2.25)2 = 3126.25 • Industry C: 2(25)2+5(5)2 = 2000 COL Gutermuth - Industrial Organization

  10. Our Example: Conclusions • Industry B has the greatest disparity in firm size. • Industries B & C are more concentrated than Industry A. COL Gutermuth - Industrial Organization

  11. Note on HHI 0  HHI  10,000 • HHI = 0 when many firms, none with substantial share. • HHI = 10,000 when monopoly exists. (HHI = 1002) COL Gutermuth - Industrial Organization

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