you have the following market shares for two industry (industry A and industry B
ID: 1137762 • Letter: Y
Question
you have the following market shares for two industry (industry A and industry B), would either industry be considered as having market power, and if so, which industry has the most market power?
A. firm in both industries have market power, with firms in industry A having the most market power.
B. firms in both industrys have market power, with firs in industry B having the most power.
C. only firms in industry A have market power
D. only firms in industry B have market power
E. neither industry has market power.
Firm Industry A Industry B 1 62% 50% 2 15% 25% 3 8% 10% 4 5% 5% 5 3% 3% 6 3% 3% 7 3% 3% 8 3% 3%Explanation / Answer
Ans.
A. Firm in both industries have market power, with firms in industry A having the most power.
To calculate market power , we use Herfindahl - Hirschman Index( HHI) . Which is calculated by summing up the squares of the percentage market shares of all firms in the market.
Market power in industry A = 62^2 + 15^2 + 8^2 + 5^2 + 3^2 + 3^2 + 3^2 + 3^2 = 4,194
Market power in industry B = 50^2 + 25^2 + 10^2 + 5^2 + 3^2 + 3^2 + 3^2 + 3^2 = 3,286
Since , HHI is above 1800 in both the industries that means both are highly concentrated. In other words both the industries have high Market power but industry A has more power than industry B. As in industry A the market power is 4,194 , which is higher than market power of industry B i.e 3,286.
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