Herfindahl - Herrschman index

Question 1

What is Herfindahl-Herschman Index?

Answer 1

The Herfindahl - Herschman Index is the method used for measuring the industry concentration by squaring the market share of the m firms operating within the industry.

Question 2

How is Herfindahl-Herschman Index better than CR?

Answer 2

As it calculates the market share by squaring them up , more weight is given to the larger firms thereby giving a clear picture of the performance of the individual ‘n’ firms operating within the industry.

Question 3

How to we calculate HHI?

Answer 3

HHI(n) = (S1)^2 +( S2) ^2+ …. + (Si) ^2

Question 4

What happens to the HHI when n = 1 ?

Answer 4

Then that single firm will have the 100% market share and the HHI will be equal to 10,000.

Question 5

What is the maximum possible value od HHI?

Answer 5

10,000

Question 6

What is the minimum possible value of HHI in a perfectly competitive industry with a large number of firms competiting against one another?

Answer 6

0 or close to 0

Question 7

What does HHI = 0 or close to 0 indicate?

Answer 7

It indicates perfect competition

Question 8

Which US Department makes use of the HHI and why?

Answer 8

The US Department of Justice makes use of the HHI as guidelines to evaluate the mergers.

Question 9

When does the HHI reflect the un concentrated market?

Answer 9

When the HHI = < 1000

Question 10

How does the US DOJ challenge the the mergers?

Answer 10

1. <1000 = un concentrated with perfect competition {no challenging the mergers}
2. 1000-1800 = moderately concentrated {close evaluation of competitive impact of mergers with HHI in this range}
3. 1800> = highly concentrated with antitrust issues from US DOJ {the transactions in such markets would severely increase the HHI by 100 or 200 points}

Question 11

What are sone of the consideration while using the Industry Concentration Measures?

Answer 11

These measures are dependent or rather influenced by the
1. definition of the relevant market.
Whether its an automobile industry or a sports utility vehicle industry
2. It also considers the geographic scope of the market
• national v/s local

Question 12

What is a price taker market?

Answer 12

A perfectly competitive market

Question 13

What are the conditions for the existence of the price taker or the perfectly competitive market?

Answer 13

1. Low entry and exit barriers - no constraints on firms entering or existing the markets.
2. Homogeneity of products - the buyers can purchase the commodity from any seller and would receive the same product.
3. Perfect knowledge of the product quality, price and cost.
4. No single buyer or seller is large enough to influence the market price.
5. Sellers must take the existing market price and adjust the quantity accordingly for profit maximisation.

Question 14

Why are the sellers in a perfectly competitive market known as price takers?

Answer 14

Since these sellers take the current prices of the perfectly competitive market abd adjust their quantity accordingly to maximise their profits.

Question 15

What are Price-Searcher Markets?

Answer 15

The price search markets are the “monopolistic competition” markets.

Question 16

What are the characteristics of the price searcher market or the monopolistic competition market?

Answer 16

1. Barriers to entry.
2. Firms in the market have downward sloping curve.
3. Heterogeneity of products on the basis of
   • location
   • taste
   • packaging
   • design
   • quality

Question 17

Give on of the best examples of price searcher and why?

Answer 17

The gas station located at a particular place is the sole seller in that location enjoying certain level of monopoly.

Question 18

How do firms in the price searcher markets enjoy flexibility in raising prices?

Answer 18

They enjoy this flexibility of raising prices as they are on the end of loosing only a few of their customers and not many.

Question 19

Why is the demand curve in price searcher markets are highly elastic? Explain with the help of thr Example of Valvoline?

Answer 19

When the Valvoline will raise the price of its products , then its customers will switch to its relatively no price changed rivals that is Pennzoil or Castrol in motor oils.

Question 20

How Come the firms in the price searcher markets face intense competition?

Answer 20

These firms may face intense competition from
1. existing suppliers
2. Potential buyers
3. Minimal to low entry barriers will help the new entrants in entering the market if they are allured with the economic profits being made in the market.
3. The price searchers can set their prices but the actual prices depend upon the “market forces”.

Question 21

What is Monopoly?

Answer 21

1.Monopoly refers to a “ Single - Seller” with no well defined substitutes in the market.
2. The monopolists need not worry about the reaction of other firms.
3. Utility companies are usually monopolists in particular markets.