use of Herfindahl Index in computing market concentration

use of Herfindahl Index in computing market concentration

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use of Herfindahl Index in computing market concentration

AND GAME THEORY

Assignment Overview

As always, make sure to thoroughly review the required background materials before starting the assignments.  The assignment questions will require you to do some calculations and also apply the concepts from the module. Question 3 differs from previous assignments in that you have to use an online simulation tool; but this activity should be a fun break from the standard numerical problems you have been doing.

Case Assignment

1.

1. For this problem use the Herfindahl Index to compute market concentration:
2. Suppose Apple has 45% of the U.S. market share for smartphones, followed by Samsung with 30%, LG with 9%, Motorola with 8%, HTC with 6%, and Nokia with 2%.  What is the Herfindahl Index for the smartphone industry based on these numbers? Based on the Herfindahl Index, do you think the government would be willing to approve a merger between Apple and Samsung?
3. Now suppose Nokia and Motorola come out with a new smartphone that takes away a huge chunk of market share from Apple and Samsung. The new market shares are 25% for Apple, 20% for Samsung, 20% for Motorola, 20% for Nokia, 10% for LG, and 5% for HTC.
4. Use what you learned about perfect competition, monopoly, and oligopoly to answer these questions:
5. In the table below is the quantity produced, the price, the fixed costs, and variable costs for a perfectly competitive firm that faces a constant price of $150 for its product regardless of the quantity it sells.  Use the information in the first four columns to calculate the number for the last four columns.  At what quantity should they produce based on what you find with your results?
6. How do you think your answer might change if it became a monopolist with all of its competitors leaving the market?  Or if it became an oligopoly with only one or two competitors?

Quantity	Price	Fixed Cost	Variable Cost	Total Cost	Marginal Cost	Total Revenue	Profit/ Loss
0	150	200	–
1	150	200	$140
2	150	200	$240
3	150	200	$320
4	150	200	$410
5	150	200	$520
6	150	200	$650
7	150	200	$810
8	150	200	$1,010
9	150	200	$1,310
10	150	200	$1,710

 

3. You’ve read about the prisoner’s dilemma in the background readings.  Suppose you are a business owner with just one main competitor.  If neither you nor your competitor cut your prices, you will both be more profitable.  However, if your competitor lowers its prices and you keep your prices high, then you will lose all of your sales to your competitor.  Every month you and your competitor place advertisements in the local newspaper with your price – so you need to decide each month whether or not to keep prices high, or lower them based on what you think your competitor might do.  Go to the following webpage and test out some of your potential price strategies: http://www.gametheory.net/Mike/applets/PDilemma/Pdilemma.htmlThe strategy “defect” indicates lowering your prices. The strategy “cooperate” means keep prices the same. Try out different strategies, such as cooperating all the time or defecting sometimes.  There are five different rounds of this game, each with a competitor with different personalities and different strategies.  Play all five rounds and experiment with different strategic approaches.  Report your scores for each round, and discuss which strategies seemed to work the best for you.

Assignment Expectations

• Answer the assignment questions directly.
• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

Module 3 – Background

MARKET STRUCTURE AND GAME THEORY

Required Reading

To start with, take a look at this short animated video that will introduce you to the basics of market structure:

McGlasson, M. (2009). Episode 25: Market structures.  https://www.youtube.com/watch?v=9Hxy-TuX9fs&list=PLr6g_xbkz_0u_cINHBVW1ZuEpozKk2XGx

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Episode 25: Market Structures

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Now read Chapters 9 and 10 from the following book for more detail on these topics.  In particular, pay attention to the numerical examples and the “Self-Check Questions” at the end of each section.

Taylor, T. (2014) Microeconomics. OpenStax College. http://cnx.org/contents/6i8iXmBj@10.174:WXgRcPaN@10/Introduction-to-a-Monopoly

 

 

Finally, read this slightly more advanced chapter. Pay special attention to the sections at the end on game theory and the “Policy Response to Oligopoly” section that covers the Herfindahl index:

 

Beveridge, T. M. (2013). Chapter 8: Between perfect competition and monopoly. A Primer on Microeconomics. [New York, N.Y.] [222 East 46th Street, New York, NY 10017]: Business Expert Press.

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Average Score 50-85%	40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.		83-76  points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.			52-49  points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality 0-45%	37-1 points The background and/or significance are missing. No search history information is provided.		75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.			48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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