10.14. HERFINDAHL INDEX BOUNDS. Suppose you only know the value of the market shares for the largest m firms in a given industry. While you do not possess information to compute the Herfindahl index, you can find a lower sufficient and an upper bound for its values. How?
10.14. HERFINDAHL INDEX BOUNDS. Suppose you only know the value of the market shares for the largest m firms in a given industry. While you do not possess information to compute the Herfindahl index, you can find a lower sufficient and an upper bound for its values. How?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Please answer 10.14
Transcribed Image Text:under each of the two technologies.
10.13. ALTERNATIVE PRODUCTION TECHNOLOGIES. Consider an industry with a homoge-
neous product where firms set output (or capacity) levels and price is determined by
total output (or capacity). Suppose there is a large number of potential entrants and that
each firm can choose one of two possible technologies, with cost functions C₁ = Fi + Ci qi
(i = 1,2).
(a) Derive the conditions for a free-entry equilibrium.
(b) Show, by means of a numerical example, that there can be more than one
equilibrium, with different numbers of large and small firms.
10.14. HERFINDAHL INDEX BOUNDS. Suppose you only know the value of the market
shares for the largest m firms in a given industry. While you do not possess sufficient
information to compute the Herfindahl index, you can find a lower and an upper bound
for its values. How?
10.15. PRODUCT DIFFERENTIATION AND MARKET STRUCTURE. Consider the monopolistic
competition model, presented in Section 4.3. What is, according to this model, the rela-
tion between the degree of product differentiation and market structure?
10.16. DOCTORS AND PLUMBERS. Consider the structure of geographically isolated mar-
kets in the US (small towns) in the following businesses: doctors, dentists, plumbers. It
can be shown that the minimum town size that justifies the entry of a second doctor is
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If you only have information on the market shares of the largest m firms in a given industry and want to obtain a lower and an upper bound for the Herfindahl index, there are two methods you can use.
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