Industrial Organization
Practice Problem Sets
Industrial Organization
Oz Shy
General Instructions for Students
1. The problem sets given in this handout are taken from old exams. 2. Exercises should NOT submitted (they will not be graded). However, 3. The best, and perhaps the only, way to ensure that you understand the material taught in class is to solve these exercises under “exam conditions” and only then check the proposed solution. 4. Solutions to all problems can be downloaded as a separate file. 5. Another advantage of solving these exercises is that they provide the best preparation for the exams. Most (but not all) exam questions will be based on variations of these exercises.
Set # 1:
Concentration Measures
(a) The diaper industry is characterized by 8 firms producing identical diapers. Let si denote the percentage market share of firm i, i = 1, 2, . . . , 8. It has been recently observed that the market shares are given by Firm i si 1 2 3 4 5 6 7 8
60% 10% 5% 5% 5% 5% 5% 5%
(i) Compute the concentration measures I4 and IHH for this industry (ii) Suppose now firm 2 and firm 3 merge and become a single firm labeled firm 23. ˆ ˆ Compute the postmerger concentration measures values I4 and IHH . def ˆ (iii) Compute the change in concentration resulting from this merger, ∆I4 = I4 − I4 and def ˆ ∆IHH = IHH − IHH . (iv) Suppose now the merger between firm 2 and firm 3 did not work out, so the two firms remain separated. However, suppose firms 6, 7, and 8 now merge. Compute ¯ ¯ the postmerger concentration measures values I4 and IHH . def ¯ (v) Compute the change in concentration resulting from this merger, ∆I4 = I4 − I4 and def ¯ ∆IHH = IHH − IHH . (vi) The Merger Guidelines in the United States suggest that a merger should not be challenged if the postmerger and the change in the Herfindahl-Hirschman concentration index IHH satisfies either i. IHH < 1000, ii. 1000 ≤ IHH < 1800, and ∆IHH < 100, or
Draft=io-exercises090619.tex 2009/06/19 16:25 Page 1 of 33 Downloaded from:
Industrial Organization
Oz Shy
General Instructions for Students
1. The problem sets given in this handout are taken from old exams. 2. Exercises should NOT submitted (they will not be graded). However, 3. The best, and perhaps the only, way to ensure that you understand the material taught in class is to solve these exercises under “exam conditions” and only then check the proposed solution. 4. Solutions to all problems can be downloaded as a separate file. 5. Another advantage of solving these exercises is that they provide the best preparation for the exams. Most (but not all) exam questions will be based on variations of these exercises.
Set # 1:
Concentration Measures
(a) The diaper industry is characterized by 8 firms producing identical diapers. Let si denote the percentage market share of firm i, i = 1, 2, . . . , 8. It has been recently observed that the market shares are given by Firm i si 1 2 3 4 5 6 7 8
60% 10% 5% 5% 5% 5% 5% 5%
(i) Compute the concentration measures I4 and IHH for this industry (ii) Suppose now firm 2 and firm 3 merge and become a single firm labeled firm 23. ˆ ˆ Compute the postmerger concentration measures values I4 and IHH . def ˆ (iii) Compute the change in concentration resulting from this merger, ∆I4 = I4 − I4 and def ˆ ∆IHH = IHH − IHH . (iv) Suppose now the merger between firm 2 and firm 3 did not work out, so the two firms remain separated. However, suppose firms 6, 7, and 8 now merge. Compute ¯ ¯ the postmerger concentration measures values I4 and IHH . def ¯ (v) Compute the change in concentration resulting from this merger, ∆I4 = I4 − I4 and def ¯ ∆IHH = IHH − IHH . (vi) The Merger Guidelines in the United States suggest that a merger should not be challenged if the postmerger and the change in the Herfindahl-Hirschman concentration index IHH satisfies either i. IHH < 1000, ii. 1000 ≤ IHH < 1800, and ∆IHH < 100, or
Draft=io-exercises090619.tex 2009/06/19 16:25 Page 1 of 33 Downloaded from: