Use the information in the table below to answer question 4: a-d Market share (p

Question

Use the information in the table below to answer question 4: a-d Market share (percent of sales) 32 17 15 10 Company 4. Suppose there are ten firms that occupy the Odell, Oregon cherry pie market. The market share of each firm is listed in the above table a) What is the four-firm concentration ratio in this market? b) What is the Herfindahl-Hirschman Index for this market? c) If Firm H and Firm A merge, what is the new Herfindahl-Hirschman Index for this market? d) A severe winter causes every firm except A, B, and E to close. With only these three firms operating, Firm A's market share is 71 percent, Firm B's market share is 23 percent, and Firm C's market share is 6 percent. What is the Herfindahl-Hirschman Index for this market now?

Explanation / Answer

(a)

Four-firm concentration ratio is calculated by adding up the market share (in percentage terms) of four largest firms in the market.

In the given market, four-largest firms are - Company A, Company B, Company C, and Company D.

Calculate the four-firm concentration ratio -

Four-firm concentration ratio = Market share of company A + Market share of company B + Market share of company C + Market share of company D

Four-firm concentration ratio = 32% + 17% + 15% + 10% = 74%

The four-firm concentration ratio is 74%.

(b)

Herfindahl-Hirschman index is calculated by squaring the market share of each firm in the market and then adding them.

Calculate HHI in this market -

HHI = (Market share of A)2 + (Market share of B)2 + (Market share of C)2 + (Market share of D)2 + (Market share of E)2 + (Market share of F)2 + (Market share of G)2 + (Market share of H)2 + (Market share of I)2 + (Market share of J)2

HHI = (32)2 + (17)2 + (15)2 + (10)2 + (7)2 + (7)2 + (5)2 + (4)2 + (2)2 + (1)2

HHI = 1,024 + 289 + 225 + 100 + 49 + 49 + 25 + 16 + 4 + 1 = 1,782

The HHI for this market is 1,782.

(c)

If Firm H and A merges then their combined market share will be (32+4) 36 percent.

Calculate new HHI -

HHI = (Market share of A and H)2 + (Market share of B)2 + (Market share of C)2 + (Market share of D)2 + (Market share of E)2 + (Market share of F)2 + (Market share of G)2 + (Market share of I)2 + (Market share of J)2

HHI = (36)2 + (17)2 + (15)2 + (10)2 + (7)2 + (7)2 + (5)2 + (2)2 + (1)2

HHI = 1,296 + 289 + 225 + 100 + 49 + 49 + 25 + 4 + 1 = 2,038

The new HHI for this market is 2,038.

(d)

Calculate HHI after closure of some firms -

HHI = (Market share of A)2 + (Market share of B)2 + (Market share of C)2

HHI = (71)2 + (23)2 + (6)2

HHI = 5,041 + 529 + 36

HHI = 5,606

The HHI for this market now is 5,606.

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