3. Market Concentration Assume four firms in one industry have market shares of

Question

3. Market Concentration Assume four firms in one industry have market shares of 20, 25, 40, and 15 percent respectively. Calculate the Herfindahl-Hirschman Index for the industry. How would the Justice Department classify this industry? A. HH 2850, concentrated B. HHI 2850, moderately concentrated C. HHI 1475, unconcentrated D. HHI-1475, moderately concentrated 4. Pricing Strategies Which of the following is required for successful price discrimination? A. Firms must be able to separate consumers into different segments which have different price elasticities B. Firms must be operating in a perfectly competitive market. C. Firms must be able to offer consumers the opportunity to resell the product to consumers that were charged a higher price. D. Firms must be able to segment and police the different consumer groups with varying price elasticities even if the additional cost exceed the additional revenue from price discrimination.

Explanation / Answer

Answer 3: A

HHI is the sum of the squares of the market share of all the firms in the market.

Firm 1' share = 20% = 0.2

Firm 2' share = 25% = 0.25

Firm 3' share = 40% = 0.4

Firm 4' share = 15% = 0.15

HHI = 0.22 + 0.252 + 0.42 + 0.152 = 0.04 + 0.0625 + 0.16 + 0.0225 = 0.285 or 2850

Jusitce Department considers a maket having HHI greater than 2500 to be concentrated.

Answer 4: A

For successful price discrimination, the seller must be able to divide the market into segment such that each segment has different price elasticity and then charging different prices from all the sectors.

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