Official 1n hhi 1 or 10000 n ri hhi 10000

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Unformatted text preview: 0000) N Ri HHI = 10000 × ∑ N i =1 ∑ Ri i =1 2 ÷ ÷ ÷ ÷ 7 What affects unilateral market power? • • • Look at concentration indices, e.g. Look Hirschman-Herfindahl-Index (HHI) Hirschman-Herfindahl-Index 1st: Look at LEVEL 2nd: Look at Change of HHI • • • • US Merger Guidelines: If the post merger HHI is US lower than 1,000 (low concentration), merger will be approved. be If HHI between 1000 and 1800, merger is If approved as long as HHI does not increase more than 100 points due to merger. than If HHI > 1800, merger is not challenged, only if HHI If does not increase by more than 50 points. does OTHERWISE: merger case will be investigated in merger detail. detail. 8 Problems with Herfindahl Index It It does not necessarily capture the actual competition in the market competition Consider Consider a duopoly: We know that a Cournot equilibrium will result in a higher price than the Bertrand equilibrium ( = price equals marginal cost) Bertrand Thus, Bertrand market is much more competitive than Thus, a Cournot market Cournot However, the HHI would be misleading in this case as However, it would equal 0.5 in both cases it In In both cases, firms share the market equally, and HHI takes the lowest possible value 1/N ( = no concentration) = 0.5 in the duopoly case. the HHI = 0.52 + 0.52 = 0.5 9 Problems with Herfindahl Index Often the Herfindahl Index is not based on the relevant Often market of a company market Example from Germany: There is only one producer of motor Example cycles in Germany BMW. The official Herfindahl Index for the German motor cycle industry The is equal to 1 (or 10000) is monopoly! However, we know that BMW has certainly no monopoly. The However, market is competitive as there are many foreign brands of motor cycles. cycles. Standard HHI typically accounts only for domestic production. In Standard times of globalization this is very misleading. HHI biased upwards. upwards. 10 10 Problems with Herfindahl Index Furthermore, a firm has to be classified into a single Furthermore, industry. Usually done by product sales in main marke...
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