Nature of Industry
Learning Objectives:
• What is industry/market structure?
• How do we measure industry concentration?
• What are different types of mergers?
Market Structure
• Number of firms
• Relative firm sizes
• Product demand
• Technology of production
• Cost structures
• Ease of entry and exit
Industry Concentration
• Four-firm concentration ratio (FFCR)
𝑆𝑎𝑙𝑒𝑠1 + 𝑆𝑎𝑙𝑒𝑠2 + 𝑆𝑎𝑙𝑒𝑠3 + 𝑆𝑎𝑙𝑒𝑠4
𝐶4 =
𝑆𝑎𝑙𝑒𝑠𝑇𝑜𝑡𝑎𝑙
• FFCR will vary between 0 (less concentrated) and 1 (highly concentrated).
• Herfindahl-Hirschman index (HHI)
𝑛
𝑤2
𝐻𝐻𝐼 = 10,000 ∗
𝑖=1
𝑆𝑎𝑙𝑒𝑠𝑖
& 𝑖 = 1, … , 𝑛
𝑖 , 𝑤ℎ𝑒𝑟𝑒 𝑤𝑖 =
𝑆𝑎𝑙𝑒𝑠𝑇
• As n∞, HHI0; as n1, HHI10,000
• Example: SARFT Regulation 17 and China's Beer Market, 2004
Measure of Demand Conditions
• Rothschild Index
𝜀𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦
𝑅=
𝜀𝐹𝑖𝑟𝑚
• Rothschild index can vary between 0 and 1.
• Higher availability of substitutes for a product means Rothschild index
will be closer to zero.
Pricing Behavior
• Lerner Index
𝑃 − 𝑀𝐶
𝐿=
𝑃
• Lerner index can vary between 0 (lower mark up) and 1 (higher mark
up).
• Lerner index is a measure of a firm’s mark up.
• More competitive market means Lerner index will be closer to zero.
Integration and Merger
• Industry structure changes when either of these takes place
• Vertical merger
• Horizontal merger
• Conglomerate merger
• Example: Scale and Scope at Citigroup
• Example: Mahindra-Satyam
• Example: Too big too fail
• Example: AT&T & T-Mobile proposed merger blocked by FTC
• Example: Jet Airways Etihad strategic alliance
• Example: Sony and Loews
Profit versus Social Welfare
• Which objective to be maximized?
• Example: Uber Caps Surge Pricing During Juno Snowmageddon
(Because It Sort Of Has To)