Most Antitrust Agencies across the world use market concentration as a proxy for

Question

Most Antitrust Agencies across the world use market concentration as a proxy for market power. There is a clear theoretical way to derive the relationship between market concentration (The Herfindahl Hirschman Index) and market power (Lerner Index) out of a Cournot oligopolistic model. Despite this, we’ve come across several cases throughout the semester in which this relationship didn’t seem so clear. Please list the assumptions used in deriving this relationship and why that may not be the case when trying to assess empirically.

Explanation / Answer

Suppose firms in this market complete choosing levelof output, and marginal cost is the same across fim ci=30i. (a) What will be the cournot-Nash equilibrium in this firm of N=4? (b) what will be the market price?(c) How about each firm's profit un equilibrium? (d) What is the herfindahl -hirschman index? (e) is thus market concentrate according to the FTC & DOJ guideline? The organization of petroleum exporting (OPEC) is an intergovernmental organization of 13 nation founded in 1960 in baghdad by the first five members (iran, Iraq, Kuwait, Soudi Arabia, Venezuela). As of 2015, the 13 countries accounted for an estimate 42 percent of global oil production and 73 pere of world proven oil reserve giving OPEC a major influence on global oil prices that were previously determined by american-dominated multinational oil companies. Understanding this type of dynamic in which a few countries (or firms) dominate the market being able to set the price yet unable to raise significant barriers to entry to keep smaller competitor form entering the market entails diving into the price leadership model. Start with the following assumption. The world mart demand for oil is given by P=100-X in which X is the aggregate market quantity of crude oil barrels. This market is served by OPEC, a dominant block, and a set of infinity many countries with smaller oil reserve which act as price-takers. OPEC is comprised of two dominating companies, denoted DC1 and DC2 with similar efficiencies. Constant marginal cost such that MCDC,,1 = MCDC2 = 50. The smaller coue have an aggregate marginal cost that can be expressed by MCSC = 50+X. 1. What does the shape of this inverse market demand tells you about natural of products differentiation in this market? Does it make sense in the oil market? Explain how does constant marginal cost for the countries tells us about the nature of dominant countries tells us about the nature of the production function for oil in those countries? Does it make sense in the oil market? Explain how you got to this conclusion.

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