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) 𝐶 4 = 𝑆𝑎𝑙𝑒𝑠 1 + 𝑆𝑎𝑙𝑒𝑠 2 + 𝑆𝑎𝑙𝑒𝑠 3 + 𝑆𝑎𝑙𝑒𝑠 4 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 FFCR will vary between 0 (less concentrated) and 1 (highly concentrated). Herfindahl-Hirschman index (HHI) 𝐻𝐻𝐼=10,000∗ 𝑖=1 𝑛 𝑤 2 𝑖 , 𝑤ℎ𝑒𝑟𝑒 𝑤 𝑖 = 𝑆𝑎𝑙𝑒𝑠 𝑖 𝑆𝑎𝑙𝑒𝑠 𝑇 & 𝑖=1,…,𝑛 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 𝑅= 𝜀 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝜀 𝐹𝑖𝑟𝑚 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 𝐿= 𝑃−𝑀𝐶 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)