Chapter 7, The Nature of Industry Video Solutions, Managerial Economics & Business Strategy

Problem 1

Ten firms compete in a market to sell product $X$. The total sales of all firms selling the product are $$\$ 1$$ million. Ranking the firms' sales from highest to lowest, we find the top four firms' sales to be $$\$ 175,000$$, $$\$ 150,000$$, $$\$ 125,000$$, and $$\$ 100,000$$, respectively. Calculate the four-firm concentration ratio in the market for product $X$.

Mrinal Rana

Numerade Educator

04:33

Problem 2

An industry consists of three firms with sales of $$\$ 200,000$$, $$\$ 500,000$$, and $$\$ 400,000$$.
a. Calculate the Herfindahl-Hirschman index (HHI).
b. Calculate the four-firm concentration ratio $\left(C_4\right)$.
c. Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, do you think the Department of Justice would attempt to block a horizontal merger between two firms with sales of $$\$ 200,000$$ and $$\$ 400,000$$ ? Explain.

Jesse Leija

Numerade Educator

04:02

Problem 3

Suppose the own price elasticity of market demand for retail gasoline is -0.9 , the Rothschild index is 0.6 , and a typical gasoline retailer enjoys sales of $$\$ 1.2$$ million annually. What is the price elasticity of demand for a representative gasoline retailer's product?

Luuk Verhoeven

Numerade Educator

09:35

Problem 4

A firm has $$\$ 1$$ million in sales, a Lerner index of 0.65 , and a marginal cost of $$\$ 35$$, and competes against 1,000 other firms in its relevant market.
a. What price does this firm charge its customers?
b. By what factor does this firm mark up its price over marginal cost?
c. Do you think this firm enjoys much market power? Explain.

Yang Su

Numerade Educator

02:04

Problem 5

Evaluate the following statement: "Managers should specialize by acquiring only the tools needed to operate in a particular market structure. That is, managers should specialize in managing either a perfectly competitive, monopoly, monopolistically competitive, or oligopoly firm."

Erwin Antoni

Numerade Educator

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Problem 6

Under what conditions might the Justice Department approve a merger between two companies that operate in an industry with a premerger HerfindahlHirschman index of 2,900 if the postmerger index is expected to increase by 225 ?

Rashmi Sinha

Numerade Educator

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Problem 7

Based only on the knowledge that the premerger market share of two firms proposing to merge was 20 percent each, an economist working for the Justice Department was able to determine that, if approved, the postmerger $\mathrm{HHI}$ would increase by 800 . How was the economist able to draw this conclusion without knowledge of the other firms' market shares? From this information, can you devise a general rule explaining how the Herfindahl-Hirschman index is affected when exactly two firms in the market merge? (Hint: Compare $a^2+$ $b^2$ with $(a+b)^2$.)

Rashmi Sinha

Numerade Educator

00:46

Problem 8

Consider a firm that operates in a market that competes aggressively in prices. Due to the high fixed cost of obtaining the technology associated with entering this market, only a limited number of other firms exist. Furthermore, over 70 percent of the products sold in this market are protected by patents for the next eight years. Does this industry conform to an economist's definition of a perfectly competitive market?

Oluwadamilola Ameobi

Numerade Educator

01:51

Problem 9

Based on the information given, indicate whether the following industry is best characterized by the model of perfect competition, monopoly, monopolistic competition, or oligopoly.
a. Industry A has a four-firm concentration ratio of 0.005 percent and a Herfindahl-Hirschman index of 75. A representative firm has a Lerner index of 0.45 and a Rothschild index of 0.34 .
b. Industry B has a four-firm concentration ratio of 0.0001 percent and Herfindahl-Hirschman index of 55. A representative firm has a Lerner index of 0.0034 and Rothschild index of 0.00023 .
c. Industry $\mathrm{C}$ has a four-firm concentration ratio of 100 percent and HerfindahlHirschman index of 10,000 . A representative firm has a Lerner index of 0.4 and Rothschild index of 1.0 .
d. Industry D has a four-firm concentration ratio of 100 percent and HerfindahlHirschman index of 5,573. A representative firm has a Lerner index equal to 0.43 and Rothschild index of 0.76 .

Crystal Wang

Numerade Educator

01:28

Problem 10

The four-firm concentration ratios for industries $X$ and $Y$ are 89 percent and 62 percent, respectively, while the corresponding Herfindahl-Hirschman indexes are 2,600 and 1,200. The Dansby-Willig performance index for industry $\mathrm{X}$ is 0.6 , while that for industry $\mathrm{Y}$ is 0.8 . Based on this information, which would lead to the greatest increase in social welfare: A slight increase in industry X's output, or a slight increase in industry Y's output?

Lucas Finney

Numerade Educator

Problem 11

You work at a firm on Wall Street that specializes in mergers, and you are the team leader in charge of getting approval for a merger between two major beer manufacturers in the United States. While Table 7-2 in the text indicates that the four-firm concentration ratio for the 494 breweries operating in the United States is 91 percent, your team has put together a report suggesting that the merger does not present antitrust concerns even though the two firms each enjoy a 15 percent share of the U.S. market. Provide an outline of your report.

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02:04

Problem 12

Forey, Inc., competes against many other firms in a highly competitive industry. Over the last decade, several firms have entered this industry and, as a consequence, Forey is earning a return on investment that roughly equals the interest rate. Furthermore, the four-firm concentration ratio and the Herfindahl-Hirschman index are both quite small, but the Rothschild index is significantly greater than zero. Based on this information, which market structure best characterizes the industry in which Forey competes? Explain.

Andrew Davis

Numerade Educator

04:10

Problem 13

Firms like Papa John's, Domino's, and Pizza Hut sell pizza and other products that are differentiated in nature. While numerous pizza chains exist in most locations, the differentiated nature of these firms' products permits them to charge prices above marginal cost. Given these observations, is the pizza industry most likely a monopoly, perfectly competitive, monopolistically competitive, or an oligopoly industry? Use the causal view of structure, conduct, and performance to explain the role of differentiation in the market for pizza. Then apply the feedback critique to the role of differentiation in the industry.

Oluwadamilola Ameobi

Numerade Educator

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Problem 14

Which of the following would most likely be scrutinized under the FTC and DOJ Horizontal Merger Guidelines?
a. Two automakers steeped in tradition-Daimler-Benz AG and Chrysler Corporation-merge.
b. Cigarette maker Philip Morris merges with the Miller Brewing Company.
c. Silicon Graphics, Inc., plans to acquire Alias Research Inc. and Wavefront Technologies, Inc. The latter companies produce animation and graphics software used by the entertainment industry to produce special effects like those featured in the film Jurassic Park. Silicon Graphics has a 90 percent share of the market for the workstations that run such software.

James Kiss

Numerade Educator

04:20

Problem 15

Nationwide Bank has approached Hometown Bank with a proposal to merge. The following table lists the sales of the banks in the area. Use this information to calculate the four-firm concentration ratio and the HerfindahlHirschman index. Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, do you think the Justice Department is likely to challenge the proposed merger?
$$
\begin{array}{|lc|}
\hline {}{}{\text { Bank Name }} & \begin{array}{c}
\text { Sales } \\
\text { (in millions) }
\end{array} \\
\hline \text { MegaBank } & \$ 900 \\
\text { Cily Bank } & 850 \\
\text { Nationwide Bank } & 735 \\
\text { Aflantic Savings } & 555 \\
\text { Bulk Bank } & 345 \\
\text { Metropolitan Bank } & 340 \\
\text { American Bank } & 265 \\
\text { Hametown Bank } & 120 \\
\text { Urban Bank } & 90 \\
\hline
\end{array}
$$

Jennifer Stoner

Numerade Educator

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Problem 16

Suppose Fiat recently entered into an Agreement and Plan of Merger with Case for $$\$ 4.3$$ billion. Prior to the merger, the market for four-wheel-drive tractors consisted of five firms. The market was highly concentrated, with a HerfindahlHirschman index of 3,025. Case's share of that market was 27 percent, while Fiat comprised just 13 percent of the market. If approved, by how much would the postmerger Herfindahl-Hirschman index increase? Based only on this information, do you think the Justice Department would challenge the merger? Explain.

Rashmi Sinha

Numerade Educator

02:21

Problem 17

Use the estimated elasticities in Table $7-4$ to calculate the Rothschild index for each industry. Based on these calculations, which industry most closely resembles perfect competition? Which industry most closely resembles monopoly?

Nick Johnson

Numerade Educator

02:01

Problem 18

Several years ago, Pfizer and Warner-Lambert agreed to a $$\$ 90$$ billion merger, thus creating one of the world's largest pharmaceutical companies. Pharmaceutical companies tend to spend a greater percentage of sales on R\&D activities than other industries. The government encourages these R&D activities by granting companies patents for drugs approved by the Federal Drug Administration. For instance, Pfizer-Warner-Lambert spent large sums of money developing its popular cholesterol-lowering drug, Lipitor, which is currently protected under a patent. Lipitor sells for about $$\$ 3$$ per pill. Calculate the Lerner index if the marginal cost of producing Lipitor is $$\$ 0.3$0$ per pill. Does the Lerner index make sense in this situation? Explain.

Sheryl Ezze

Numerade Educator

Problem 19

Many MBAs who ventured into the "dot-com" world of the late 1990 s found themselves unemployed by 2001 as many firms in that industry ceased to exist. However, during their tenure with these companies, these managers gained valuable skills in how to operate within a highly competitive environment. Based on the numbers in Table 7-3 in this chapter, which industries represent the best match for these managers' expertise? Looking at the industries listed in Table 7-3, what factors give rise to the varying levels of market power?

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01:54

Problem 20

A decade ago, five firms supplied amateur color film in the United States: Kodak, Fuji, Konica, Agfa, and $3 \mathrm{M}$. From a technical viewpoint, there was little difference in the quality of color film produced by these firms, yet Kodak's market share was 67 percent. The own price elasticity of demand for Kodak film was -2.0 and the market elasticity of demand was -1.75 . Suppose that in the $1990 \mathrm{~s}$, the average retail price of a roll of Kodak film was $$\$ 6.95$$ and that Kodak's marginal cost was $$\$ 3.475$$ per roll. Based on this information, discuss industry concentration, demand and market conditions, and the pricing behavior of Kodak in the $1990 \mathrm{~s}$. Do you think the industry environment is significantly different today? Explain.

Niamat Khuda

Numerade Educator

02:18

Problem 21

Del Monte has a long and rich tradition in the American food processing industry. It is perhaps best known for packaging canned fruits and vegetables. Part of its success has involved acquiring other brands of canned fruits and vegetables. Suppose that Del Monte is continuing its business plan of expansion by acquisition and that the following table summarizes potential acquisition targets. As the CEO's horizontal merger and acquisition advisor, it is your task to guide the decision-making process. Based only on the information contained in the table, is a horizontal merger with one of these companies likely to pass the U.S. government's scrutiny and enhance Del Monte's performance? Justify your conclusion.
$$
\begin{array}{|c|c|c|c|c|c|c|c|}
\hline \text { Company } & \text { Product Line } & \begin{array}{c}
\text { Profit } \\
\text { as } \% \text { of } \\
\text { Sales }
\end{array} & C_4 & \text { HHI } & \begin{array}{c}
\text { Rothschild } \\
\text { Index }
\end{array} & \begin{array}{l}
\text { Lerner } \\
\text { Index }
\end{array} & \begin{array}{l}
\text { Dansby- } \\
\text { Willig } \\
\text { Index }
\end{array} \\
\hline \text { Unilever } & \text { Dove-personal care } & 5.2 & 24.1 \% & 874 & 0.11 & 0.94 & 0.01 \\
\hline \text { TricorBraun } & \text { Food-grade cans } & 6.8 & 32.7 \% & 1065 & 0.64 & 0.67 & 0.40 \\
\hline \text { Goyo } & \text { Canned tomatoes } & 7.1 & 86.3 \% & 3297 & 0.74 & 0.32 & 0.66 \\
\hline \text { Dole } & \text { Canned pineapple } & 8.7 & 94.2 \% & 5457 & 0.76 & 0.14 & 0.72 \\
\hline
\end{array}
$$

Manasvee Singh

Numerade Educator

03:41

Problem 22

In January 2007, XM enjoyed about 58 percent of satellite radio subscribers, and Sirius had the remaining 42 percent. Both firms were suffering losses, despite their dominance in the satellite radio market. In 2008, the DOJ decided not to challenge a merger, and these two firms united to become Sirius XM. If you were an economic consultant for Sirius, what economic arguments would you have presented to the DOJ to persuade it not to challenge the merger? Explain.

Jennifer Stoner

Numerade Educator

01:53

Problem 23

Recently, the Federal Communications Commission (FCC) implemented "local number portability" rules allowing cellular phone consumers to switch cellular providers within the same geographic area and maintain the same phone number. How would you expect this change to affect the Rothschild index for the cellular service industry?

Doris Bennett

Numerade Educator