Chap 007

Chapter 07 - The Nature of Industry

Chapter 07The Nature of Industry

Multiple Choice Questions

1. Which of the following are measures of industry concentration? a. four-firm concentration ratiob. HHI indexc. Consumer surplusD. Four-firm concentration ratio and HHI index

Difficulty: Easy

2. A firm has a marginal cost of $20 and charges a price of $40. The Lerner index for this firm is: a. 0.20B. 0.50c. 0.33d. 0.75

Difficulty: Easy

3. An industry is comprised of 20 firms, each with an equal market share. What is the 4-firm concentration ratio of this industry? A. 0.2b. 0.4c. 0.6d. 0.8

Difficulty: Easy

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4. A firm's average cost is $20 and it charges a price of $20. The Lerner index for this firm is: a. 0.20b. 0.50c. 0.33D. Insufficient information

Difficulty: Medium

5. An industry is comprised of ten (10) firms, each with an equal market share. What is the 4-firm concentration ratio of this industry? a. 0.2B. 0.4c. 0.6d. 0.8

Difficulty: Easy

6. An unregulated industry has a Lerner index of zero. These numbers: a. Reveal that social welfare would be improved by regulating the firmsb. Are consistent with the industry being monopolistically competitiveC. Are consistent with the industry being perfectly competitived. Reveal that social welfare would be improved by regulating the firms and are consistent with the industry being monopolistically competitive

Difficulty: Hard

7. The concentration and Herfindahl indices computed by the U.S. Bureau of Census must be interpreted with caution because a. They overstate the actual level of concentration in markets served by foreign firmsb. They understate the degree of concentration in local markets, such the gasoline marketC. All of the statements associated with this question are correctd. None of the statements associated with this question are correct

Difficulty: Medium

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8. The industry elasticity of demand for gadgets is -2, while the elasticity of demand for an individual gadget manufacturer's product is -2. Based on the Rothschild approach to measuring market power, we conclude that a. There is little monopoly power in this industryB. There is significant monopoly power in this industryc. The Herfindahl index for this industry is -2d. The Herfindahl index for this industry is 2

Difficulty: Medium

9. A Herfindahl index of 10,000 suggests a. Perfect competitionb. Monopolistic competitionC. Monopolyd. Oligopoly

Difficulty: Medium

10. A Herfindahl index of 0 suggests a. Monopolyb. Monopolistic competitionC. Perfect competitiond. Oligopoly

Difficulty: Medium

11. A Lerner index of 0 suggests a. Monopolyb. Monopolistic competitionc. OligopolyD. Perfect competition

Difficulty: Medium

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12. When economies of scale are large, firms can reduce their average total cost by a. Selling off their subsidiariesB. Merging into an even larger firmc. Eliminating the bureaucratic costsd. Hiring professional managers

Difficulty: Medium

13. Which of the following is not one class of a market structure? a. Perfect competitionB. Dictatorshipc. Monopolyd. Monopolistic competition

Difficulty: Easy

14. Which of the following kinds of market structure are not associated with market power: a. OligopolyB. Perfect competitionc. Monopolistic competitiond. Perfect competition and monopolistic competition

Difficulty: Medium

15. Monopolistic competition is characterized by: A. Heterogenous productsb. Employing labor from a perfectly competitive labor marketc. No free entryd. Large markets

Difficulty: Easy

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16. Oligopoly differs from monopoly as follows: A. Oligopoly involves a few firms; monopoly involves a single firmb. Oligopoly does use advertisement; monopoly does not use advertisementc. Oligopoly involves free entry; monopoly involves no free entryd. Oligopoly involves a few firms; monopoly involves a single firm and oligopoly involves free entry; monopoly involves no free entry

Difficulty: Easy

17. In perfect competition, which is not true? A. Every firm has a small but perceivable market powerb. There are a large number of firmsc. Firms are price-takersd. Firms produce homogenous goods

Difficulty: Medium

18. Which of the following is used to measure market structure and performance? a. Four-firm concentration ratiob. HHI (Herfindahl-Hirschman Index)c. Dansby-Willig Performance IndexD. All of the statements associated with this question are correct

Difficulty: Easy

19. Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are 4-firms in industry B with equal sales of $2.5 million for each firm. The four-firm concentration ratio for industry A is: A. 0.9b. 1.0c. 0.8d. 0.7

Difficulty: Medium

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20. Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are 4-firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry A is A. 3,200b. 2,800c. 1,800d. 2,500

Difficulty: Medium

21. Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are 4-firms in industry B with equal sales of $2.5 million for each firm. The four-firm concentration ratio for industry B is: a. 0.9B. 1.0c. 0.8d. 0.7

Difficulty: Medium

22. Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are 4-firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry B is: A. 2,500b. 1,800c. 3,200d. 2,800

Difficulty: Medium

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23. A student in a managerial economics class calculated the four-firm concentration ratio and HHI for industries A and B. What is the proper conclusion she can draw from the following findings?

a. Industry B is a monopolyb. The market power of firms in industry A is greater than that in industry Bc. C4 is higher for Industry A while the HHI is higher for Industry B. This inconsistency must be due to a calculation errorD. Neither industry is perfectly competitive

Difficulty: Medium

24. As a general rule of thumb, industries with a Herfindahl index below ______ are considered to be competitive, while those above ______ are considered non-competitive. A. 1,000, 1,800b. 1,800, 1,000c. 1,000, 3,000d. 1,800, 3,000

Difficulty: Easy

25. The ranking of industries by the four-firm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI. When a discrepancy is found it is usually due to the following: a. The four-firm concentration indices contain data on only the largest four-firms, while the HHI are based on data for all firms in the industryb. The HHI is based on squared market shares, while the four-firm concentration ratio is notC. The four-firm concentration indices contain data on only the largest four-firms, while the HHI are based on data for all firms in the industry and the HHI is based on squared market shares, while the four-firm concentration ratio is notd. The two indices are designed to measure two different attributes of markets

Difficulty: Medium

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26. A student figured out that the HHI for an industry was 15,000. What is the proper conclusion? a. The market is monopolisticb. The market is close to perfectly competitive or monopolistically competitionC. The student made some computational errorsd. There is free entry in the market

Difficulty: Medium

27. In the 1960s, each firm in the computer industry was able to make extremely large profit margins, some as high as 50-60%. The margin decreased to 20-40% in the 1970s and to 10-20% in the 1980s. We conclude that: a. Market power increased in the two decadesB. The industry has evolved from oligopolistic to a more competitive industry in the two decadesc. Lower profit margins were due to the government's regulation to protect consumersd. Lower profit margins were largely due to the mal-management of computer firms

Difficulty: Medium

28. The concentration and HHI reported in the U.S. Bureau of Census must be interpreted with caution since: a. They are calculated by excluding foreign imports hence bias upward the degree of concentrationb. They are based on figures for the entire national marketc. The definition of product classes used to define an industry affects the resultsD. All of the statements associated with this question are correct

Difficulty: Medium

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29. When the relevant markets are local, the concentration and HHI based on figures for the entire United States tend to: A. Be biased downwardb. Be biased upwardc. Give a more precise description of the real situationd. Ignore the presence of import goods

Difficulty: Medium

30. Suppose each of the 50 states had only one gasoline station -- each of the same size. The four-firm concentration ratio, based on national data, would be: A. 0.08b. 0.16c. 0.32d. 1.0

Difficulty: Medium

31. Suppose each of the 50 states had only one gasoline station -- each of the same size. The four-firm concentration ratio for the state of New York, based on the state data, is: A. 1.0b. 0.08c. 0.32d. 0.16

Difficulty: Medium

32. Suppose each of the 50 states had only one gasoline station -- each of the same size. The four-firm concentration ratio a consumer experiences is: A. 1.0b. 0.08c. 0.32d. 0.16

Difficulty: Medium

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33. An industry consists of six firms with an annual sales of $300, $500, $400, $700, $600, and $600, respectively. What is the industry's C4? a. 0.58b. 0.62c. 0.74D. 0.77

Difficulty: Medium

34. An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600, respectively. What is the industry's HHI? a. 1,659B. 1,779c. 1,839d. 1,909

Difficulty: Hard

35. An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600, respectively. According to the general rule of thumb, the HHI of this industry implies that the market structure is: a. CompetitiveB. Non-competitivec. Non-inclusived. Monopoly

Difficulty: Medium

36. The causal view of the industry believes that: A. Market structure causes firms to behave in a certain wayb. Market performance causes firms to have a certain structurec. Market performance causes firms to behave in a certain wayd. Behavior causes firms to have a certain structure

Difficulty: Medium

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37. Pricing is an aspect of a firm's: a. Performanceb. StructureC. Conductd. Environment

Difficulty: Easy

38. According to the "feedback critique" a. The conduct of firms in an industry may affect the firm's performanceb. The conduct of firms in an industry may affect the market structurec. Market structure may affect the firm's conductD. All of the statements associated with this question are correct

Difficulty: Medium

39. Which of the following measures market structure? a. Four-firm concentration ratiob. Lerner Indexc. Herfindahl-Hirschman IndexD. All of the above may be used to make inferences about market structure

Difficulty: Hard

40. Which of the following measures market power? a. Lerner Indexb. Herfindahl-Hirschman Indexc. Rothchild IndexD. Lerner Index and Rothchild Index

Difficulty: Medium

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41. The industry elasticity of demand for telephone service is -2 while the elasticity of demand for a specific phone company is -5. What is the Rothchild index? a. 0.2B. 0.4c. 0.5d. 0.7

Difficulty: Easy

42. A local telephone company charges $.10/min. based on a $.08/min. marginal cost of operation. What is the Lerner Index? A. 0.2b. 0.25c. 0.40d. 0.50

Difficulty: Medium

43. The Dansby-Willig Index measures market a. StructureB. Performancec. Conductd. Behavior

Difficulty: Easy

44. The Dansby-Willig Index measures the potential for a change in a. Production costb. Firm's revenuec. Firm's profitD. Social welfare

Difficulty: Easy

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45. Which of the following is not a type of integration? a. Vertical mergersb. Horizontal mergersC. Mega mergersd. Conglomerate merger

Difficulty: Easy

46. Which of the following integration types exploits economies of scope? a. Vertical integrationB. Horizontal integrationc. Cointegrationd. Conglomerate integration

Difficulty: Easy

47. An electronic company takes over one of its original suppliers in a merger. This is an example of: A. Vertical integrationb. Horizontal integrationc. Cointegrationd. Conglomerate integration

Difficulty: Easy

48. An electronic company purchases a food company. This is an example of: a. Vertical integrationb. Horizontal integrationc. CointegrationD. Conglomerate integration

Difficulty: Easy

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49. Which of the following integration types aims at reducing transaction costs? A. Vertical integrationb. Horizontal integrationc. Cointegrationd. Conglomerate integration

Difficulty: Easy

50. A frozen food company buys a fresh food company. This takeover is an example of: a. Vertical integrationB. Horizontal integrationc. Cointegrationd. Conglomerate integration

Difficulty: Easy

51. The idea of improving cash flow by exploiting the cyclical nature of different product lines is represented in: a. Vertical integrationb. Horizontal integrationc. CointegrationD. Conglomerate integration

Difficulty: Medium

52. Which of the following integration types has the potential problem of increasing the firm's market power? a. Vertical integrationB. Horizontal integrationc. Cointegrationd. Conglomerate integration

Difficulty: Easy

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53. Which of the following may transform an industry from oligopoly to monopolistic competition? A. Entryb. Takeoverc. Exitd. Acquisition

Difficulty: Medium

54. Which market structure has the most market power? a. Monopolistic competitionb. Perfect competitionC. Monopolyd. Oligopoly

Difficulty: Easy

55. Which of the following statements is true? A. The market structure of an industry frequently changes over timeb. Most horizontal mergers are blocked by the governmentc. Most U.S. industries are perfectly competitived. Most U.S. industries are monopolies

Difficulty: Medium

56. The products in a monopolistically competitive industry are: a. HomogeneousB. Heterogeneousc. Competitived. Uncompetitive

Difficulty: Easy

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57. The HHI of a local market is usually _____________ that of national markets. a. Lower thanb. The same asC. Higher thand. Twice

Difficulty: Medium

58. C4 and HHI tend to ____________ the concentration in a domestic industry. a. Provide different rankings ofb. Understatec. OverstateD. Understate or overstate, depending on the true geographic market

Difficulty: Medium

59. A firm has a marginal cost of $18 and charges a price of $27. The Lerner index for this firm is: A. 0.33b. 0.50c. 0.67d. 0.75

Difficulty: Easy

60. There are five firms in an industry with sales at $7 million, $6 million, $3 million, $2 million, and $2 million, respectively. The four-firm concentration ratio is: a. 0.8B. 0.9c. 1.0d. 1.1

Difficulty: Easy

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61. The concentration and Herfindahl indices computed by the U.S. Bureau of Census must be interpreted with caution because a. They may overstate the actual level of concentration in markets served by foreign firmsb. They may understate the degree of concentration in local marketsc. The definition of product classes used to define an industry affects the resultsD. All of the statements associated with this question are correct

Difficulty: Easy

62. The industry elasticity of demand for gadgets is -2, while the elasticity of demand for an individual gadget manufacturer's product is -10. Based on the Rothschild approach to measuring market power, we conclude that a. The Herfindahl index for this industry is 5b. The Herfindahl index for this industry is 0.2C. There is no monopoly power in this industryd. There is significant monopoly power in this industry

Difficulty: Medium

63. In perfect competition, which is not true? a. Both concentration ratios and Rothschild indexes tend to be close to zerob. There are a large number of firms, and each is small relative to the entire marketC. At least one firm has a perceptible impact on the market priced. Firms produce homogenous goods

Difficulty: Easy

64. Which of the following may transform an industry from oligopoly to monopolistic competition? A. Entry of new firmsb. Significant vertical integrationc. Exit of firmsd. A series of horizontal mergers

Difficulty: Medium

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65. Conglomerate integration a. Reduces transaction costs of acquiring inputsB. Improves cash flow by exploiting the cyclical nature of different product linesc. Exploits economies of scope by merging the production of similar productsd. All of the statements associated with this question are correct

Difficulty: Easy

66. An industry is comprised of 25 firms, each with an equal market share. What is the 4-firm concentration ratio of this industry? a. 0.12B. 0.16c. 0.20d. 0.25

Difficulty: Easy

67. Monopolistic competition is characterized by a. Employing labor from a perfectly competitive labor marketb. Rothschild indices that are close to zeroc. Concentration ratios that are well above zeroD. Differentiated products

Difficulty: Easy

68. As a general rule of thumb, The U.S. Department of Justice views industries to be highly concentrated if the Herfindahl index is a. Above 1,000b. Below 1,000C. Above 1,800d. Below 1,800

Difficulty: Easy

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69. A student figured out that the HHI for an industry was 13,000. What is the proper conclusion? a. The market is monopolistically competitiveb. The market is close to perfectly competitivec. The market is served by a monopolyD. The student made some computational errors

Difficulty: Medium

70. The causal view of the industry believes that a. Market structure is caused by firm behaviorB. Firm behavior is caused by market structurec. Market performance causes firms to have a certain structured. Market performance causes firms to behave in a certain way

Difficulty: Easy

71. According to the "feedback critique" a. The conduct of firms may affect firm performanceb. The conduct of firms may affect market structurec. Market structure may affect the firm's conductD. All of the statements associated with this question are correct

Difficulty: Medium

72. Which of the following industry structures would you expect to have the lowest Lerner index score? A. Perfect competitionb. Monopolyc. Monopolistic competitiond. Oligopoly

Difficulty: Easy

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73. The Dansby-Willig Index measures the potential for a change in social welfare by examining the affect of changes in industry a. Production costB. Outputc. Revenued. Profit

Difficulty: Easy

74. The tobacco industry has a Lerner index of 0.76. Based on this information, compute the optimal markup factor. a. 4.17 times priceB. 4.17 times marginal costc. 0.24 times priced. there is not sufficient information to determine the optimal markup factor

Difficulty: Medium

75. The chemical industry has a Lerner index of 0.67. Based on this information, a firm with marginal cost of $10 should charge a price of A. $30.30b. $14,93c. $6.70d. $3.30

Difficulty: Medium

76. The Lerner index in the paper industry is 0.58. Based on this information, a firm charging $3.25 per ream of paper should have a marginal cost of a. $0B. $1.365c. $1.885d. $3.25

Difficulty: Easy

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77. Holding all else constant, higher prices will A. Increase the Lerner indexb. Decrease the Lerner indexc. Have no impact on the Lerner indexd. May increase or decrease the Lerner index depending on the relative magnitude of the price increase

Difficulty: Medium

78. Suppose you read in an industry publication that the Rothschild index for the petroleum industry is 0.88. Based on past experience, you know that the price elasticity of demand for the petroleum products sold by your firm is -1.5. Based on this information you know that the elasticity of demand for a representative firm in the petroleum industry is a. 1.32b. 1.70c. -0.587D. -1.32

Difficulty: Easy

79. Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about -1.25. An industry publication recently reported that the Rothschild index for the petroleum industry is estimated to be 0.88. Based on this information you know that the price elasticity of demand for the firm you currently work for in the petroleum industry is A. -1.42b. -1.10c. 0.704d. 1.10

Difficulty: Easy

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80. Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about -1.25. Moreover, a recent report from an economist in your office revealed that the price elasticity of demand for the petroleum products sold by your firm is -1.5. Based on this information you know that Rothschild index is a. 0.833b. 1.20c. -1.20D. -0.833

Difficulty: Easy

81. Suppose that the demand in a particular industry is given by Qd = 100 - 2P. When the market price in the industry is $10 per unit, total demand in the industry is. Furthermore, assume that each of the four largest firms in the industry sell 15 units. Based on this information, the 4-firm concentration ratio is a. Demand is 80 units and the 4-firm concentration ratio is 1.00b. Demand is 45 units and the 4-firm concentration ratio is 0.75C. Demand is 80 units and the 4-firm concentration ratio is 0.75d. Demand is 45 units and the 4-firm concentration ratio is 0.25

Difficulty: Medium

82. Suppose the market for good X has a four-firm concentration ratio of 0.80. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $100,000, $125,000, $150,000 and $175,000. Based on this information we know that sales for the remaining firms in the industry are a. $687,500b. $550,000c. $250,500D. $137,500

Difficulty: Hard

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83. Suppose the market for good X has a four-firm concentration ratio of 0.50. Furthermore, assume that total sales in the industry are $1.2 million. Based on this information we know that sales for the largest four firms in the industry equals (in aggregate) a. $600,000B. $60,000c. $2,400,000d. $240,000

Difficulty: Easy

84. Suppose that the demand in a particular industry is given by Qd = 500 - 2P. When the market price in the industry is $50 per unit, total demand in the industry is furthermore, assume that the entire market consists of four firms that share the market equally. The HHI under these conditions is then a. 225 units and 1,600B. 400 units and 2,500c. 225 units and 3,333.33d. 400 units and 10,000

Difficulty: Medium

85. Four firms control the market for a particular good resulting in an HHI of 2,900. Total industry sales are $500 and it is known that two firms each have sales of $175. If each of the remaining two firms have the same sales, then we can conclude that the remaining two firms each have a market share of a. $125b. $75C. 0.15d. 0.50

Difficulty: Hard

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86. Consider a market characterized by two firms that set the same price in the market, P = $10. Total market demand is QT = 100 - 2P, of which the two firms share equally. Based on this information we can conclude A. The HHI = 5,000 and the Rothschild index is 1b. The HHI = 2,500 and the Rothschild index is 2c. The HHI = 5,000 and the Rothschild index is 2d. None of the statements associated with this question are correct

Difficulty: Hard

87. According to the U.S. Department of Justice Merger Guidelines, a Herfindahl-Hirschman index (HHI) above is associated with a highly concentrated industry. Therefore, if the automobile industry had an HHI of 2,200, then a vertical merger between GM and one of suppliers likely would be a. 1,300 and rejected since the HHI is above the acceptable thresholdb. 2,400 and approved since the HHI is below the acceptable thresholdc. 1,800 and rejected since the HHI is above the acceptable thresholdD. None of the statements associated with this question are correct

Difficulty: Medium

88. Consider a market characterized by a Herfindahl-Hirschman index of 5,000. One of the firms in this market has a Lerner index of 0.89 and is considering a horizontal merger with a competing firm. Based on this information is it likely that the U.S. Department of Justice will a. Approve the merger since the industry is not concentrated and the firm proposing to merge has little market powerb. Reject the merger since the industry is highly concentrated, even though the firm proposing the merger has little market powerC. Reject the merger since the industry is highly concentrated and the firm proposing the merger has significant market powerd. None of the statements associated with this question are correct

Difficulty: Medium

Essay Questions

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89. Firms like McDonald's and Wendy's sell hamburgers, salads, and other products that are differentiated in nature. While numerous fast-food restaurants exist in most locations, the differentiated nature of the firms' products permits them to charge prices that are in excess of marginal cost. Given these observations, is the fast-food industry most likely a perfectly competitive industry, a monopoly, monopolistically competitive, or an oligopoly? Use the causal view of structure, conduct, and performance to explain the roles of product differentiation in the industry, and explain how the feedback critique applies in this context.

Monopolistically competitive. In a monopolistically competitive market, there are many firms, but each firm produces a differentiated product. According to the causal view, the structure of differentiated products causes firms to capitalize on the absence of close substitutes by charging higher prices.According to the feedback critique, the conduct of firms may determine the market structure. The products of firms may be differentiated because of the conduct of firms in the industry. Examples of such conduct include advertising and other behavioral tactics that feedback into demand, causing consumers to view products as differentiated. Thus, it is not at all clear that differentiated products are a structural variable.

90. During a sales meeting one of the regional managers of Toga Industries remarked that structural variables such as advertising and R&D activities by rival firms were likely to hamper the firm's sales over the next year. The manager received numerous stares after making the remarks. Why?

Structural variables include firm size, the number of firms, concentration, number of close substitutes, technology, and potential for entry - not advertising and R&D activities. These later variables reflect conduct or behavioral variables.

91. Alpha Industries operates in a highly competitive market. While there are few other firms in the industry due to the high fixed costs of building plants, rival firms are very aggressive in their pricing strategies. Of the products sold in the industry, over 80 percent have 10 years of patent protection remaining. Does this industry meet an economist's definition of a perfectly competitive industry?

No. The conditions for perfect competition include:a. There are many buyers and sellers of products.b. The products are homogenous.c. Consumers and producers have perfect information.d. There is free entry and exit.

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92. It is sometimes said that a manager of a monopoly can charge any price and customers will still have to buy the product. Do you agree or disagree? Why?

No. Once the monopoly has chosen the price, the customers will only buy a level of output stipulated by the demand curve. Consumers will not buy whatever the monopoly puts to the market once the price is fixed.

93. Omega Travel competes in the highly competitive market for travel. Consumers know that Omega has the best agents in the industry and offers superior service. Nonetheless, Omega earns zero economic profits because numerous competitors have entered the market over the last few years. Based on this information, does Omega operate in a perfectly competitive market? Why or why not?

No, since products are differentiated Omega Travel operates in a monopolistically competitive market. Products are homogenous in a perfectly competitive market.

94. "The law of comparative advantage suggests that managers should specialize in learning the tools needed to manage either a monopoly, oligopoly, monopolistically competitive, or perfectly competitive firm." Do you agree with this statement? Explain.

No. As industries mature and demand conditions change, industry structures often change.

95. In Tuna, Texas, the retail gasoline market consists of six firms. Firm 1 has 35 percent of the market, Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the four-firm concentration ratio for this industry?

Four-firm concentration ratio, C4 = 0.8.

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96. The widget industry is comprised of six firms of varying sizes. Firm 1 has 35 percent of the market. Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the Herfindahl-Hirschman index for the widget industry? Based on the U.S. Department of Justice merger guidelines described in the text, do you think the Justice Department would be likely to block a merger between firms 5 and 6?

Before the merger, HHI = 10,000[(.35)2 + (.25)2 + (.1)2 + (.1)2 + (.1)2 + (.1)2] = 2,250. After the merger the HHI increases to 10,000[(.35)2 +(.25)2 +(.10)2 +(.10)2 +(.20)2 ] = 2,450. The merger is likely to be challenged because (a) the original HHI, 2,250, is greater than that in the Guidelines (1,800) and (b) the new HHI increases by 200, which is greater than that in the Guidelines (100).

97. The Beta Corporation operates in an industry that has a Herfindahl-Hirschman index of 800. Beta wants to merge with Alpha Enterprises, but Alpha has argued that the merger will be blocked by the Justice Department. Are there conditions under which the Justice Department would allow the merger? Explain.

The HHI ignores the geographical market and foreign competition. If these resulting biases are deemed significant, the merger might be allowed. It might also be allowed if one of the firms is in financial trouble, or if significant economies of scale exist in the industry.

98. Borris Industries operates in an industry that has a Rothschild index of 0.75. The firm gained access to a government report that revealed the own-price elasticity of market demand within the industry to be -3. Use this information to obtain an estimate of the own-price elasticity of demand for the product produced by Borris Industries.

Set.75 = -3/EF and solve to get EF = -4.

99. Zelda Manufacturing has a rather unique product that sells for $15 per unit, and the marginal cost is $7.50. Determine the Lerner index for Zelda Manufacturing. Does this index indicate market power?

The Lerner index is (P - MC)/P = (15 - 7.5)/15 =.50. Since the Lerner index is positive, there is evidence of market power.

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100. Determine whether integration between the following types of firms would constitute a horizontal, vertical, or conglomerate merger. a. A food company and a drug company.b. A milk producer and a cheese producer.c. A computer chip manufacturer and a silicon producer.

a. Conglomerate merger.b. Under a broad definition of the market (dairy products), this is a horizontal merger. Under a narrower definition it might also be considered a vertical merger (milk is an input in making cheese). This is an example of a gray area of merger analysis.c. Vertical merger - silicon is an input used in making computer chips.

101. Star Computer and a small telecommunications company are considering a merger. A socially minded member of Star Computer's board of directors is against the merger, however, because she is concerned that the merger might not benefit society as a whole. Provide the board member with an argument for why it may be socially beneficial for the merger to take place.

The merger may generate economies of scope in making computers and providing telephone services, thus reducing costs and prices.

102. A host of best-selling books advance the thesis that increases in conglomerate mergers and concentration of U.S. industry are responsible for "obscene profits." Do you agree? Explain, using the Lerner index.

One of the important lessons in this chapter is that "big" firms do not necessarily earn big profits.

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Chap 007