ps2 key - Fall 2009 Economics 121B Industrial Organization...

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1 Fall 2009 Joonsuk Lee Economics 121B: Industrial Organization [email protected] Problem Set #2 Due: October 26, Monday, 9 a.m. Part I Short Answer 1 . What is the four-firm concentration ratio ( CR4 )? What do you think is a fundamental problem with CR4 ? Briefly explain. [When you explain, having an example with hypothetical industries would be very helpful.] Answer : CR4 is basically the sum of market shares of top four largest firms. A fundamental problem with CR4 is that it shows only one point on the entire market distribution. Another problem is that different distributions of industries give the same CR4. For example, let’s consider two industries X and Y. In Industry X there are 5 firms and each firm’s market share is 20, 20, 20, 20, and 20. In Industry Y there are 8 firms and each firm’s market share is 60, 10, 5, 5, 5, 5, 5, and 5. Even though CR4 of both industries are the same, i.e., 80, but the concentration of each market is different. 2 . Evaluate the following statement regarding the four-firm concentration ratios ( CR4 ) and the Herfindahl-Hirschman indexes ( HHI ). (True or False; and explain with a numerical example with hypothetical industries.)
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