Economic for managers 6351

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University of Houston-Victoria ECON 6351 Economics for Managers

QUIZ # 6 Market structures

due by 11:59 pm on Tuesday, October 30, 2018 via the ASSIGNMENTS tool within Blackboard

GENERAL INSTRUCTIONS: Although I may provide some assistance and you are encouraged to work with other students, the work you hand in must be your own -- in cases of obvious copying, no credit will be given to all students involved. HOW TO SUBMIT:

1. The assignment must be submitted before the due date & time specified above. Late submissions will not be accepted.

2. Submit your assignment electronically via the ASSIGNMENTS tool within Blackboard.

3. Your assignment must be saved as one file in a PDF format (not DOC or DOCX !!!). Submissions consisting of several files will not be accepted. In MS-Word, click the “Save As” button, and then click “PDF or XPS”. In the File Name window, type a name for the document. The name of the file should be Quiz6_Your last name. For example, Quiz6_Smith.

4. The length of your submission may not exceed 1 page [see the template in Appendix B]. Any text or tables that appear on additional pages will not be considered.

5. The paper size should be 8.5” x 11” paper (portrait orientation).

6. Write YOUR NAME and “QUIZ # 6” in the upper left-hand (or right-hand) corner of the page.

7. Use any 11-12 point standard font (Times New Roman, Garamond, Verdana, Courier New, etc.); the main thing is to keep it consistent throughout the entire text. Use single line spacing. Allow one space between paragraphs. The final version of your assignment should reach the instructor in clear and grammatically correct English. Where necessary authors must ensure that their assignments have been checked for errors of English by a person with perfect command of the language.

EVALUATION CRITERIA: Your assignment will be evaluated based upon the following criteria: - correct numerical values and/or results; - visual and esthetical impression of your tables; - reasonable conclusions derived from the examination of the available evidence.

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ASSIGNMENT: 1. Download the “Concentration Ratios in Manufacturing” publication for 2002 from

https://www.census.gov/prod/ec02/ec0231sr1.pdf . This publication (PDF) is also available within the “Quiz # 6” folder in Blackboard.

Note: Although the more recent reports for 2007 and 2012 are also available on https://www.census.gov/prod/www/economic_census.html https://www.census.gov/newsroom/press-releases/2015/cb15-tps66.html , the data in these reports are in a .DAT format and available primarily through American FactFinder.

2. Go to Table 2 “Share of Value of Shipments Accounted for by the 4, 8, 20, and 50 Largest Companies for

Industries.” The industries are organized and classified by the North American Industry Classification System (NAICS). For each industry, the table shows the percent of shipments accounted for by the largest 4, 8, 20 and 50 companies as well as the Herfindahl-Hirschmann Index. [See Appendix A.]

3. Choose any two industries of your interest. Industry categories are defined in the Appendix titled “NAICS

Codes, Titles, and Descriptions” in the “Concentration Ratios in Manufacturing” publication. The industries you selected should belong to different market structures (competition, monopolistic competition, oligopoly, or monopoly). [See Appendix B.]

4. For each industry, comment on its market structure (competition, monopolistic competition, oligopoly,

monopoly). In particular, comment on the number of companies in this industry, the so-called ‘four-firm concentration ratio’ and the Herfindahl-Hirschman index. [See Appendix A].

5. Prepare your report [use Appendix B as a template] and turn it in via the ASSIGNMENTS tool within

Blackboard.

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APPENDIX A. THE FOUR-FIRM CONCENTRATION RATIO The four-firm concentration ratio is the main measure used to assess market structure. It is the percentage of the value of sales accounted for by the four largest firms in an industry. The range of the concentration ratio is from almost zero for perfect competition to 100 percent for monopoly. A low concentration ratio indicates a high degree of competition, and a high concentration ratio indicates an absence of competition:

- a monopoly has a concentration ratio of 100 percent – the largest (and only) firm has 100 percent of the sales;

- a four-firm concentration ratio that exceeds 60 percent is regarded as an indicator of a market that is highly concentrated and dominated by a few firms in an oligopoly;

- a four-firm concentration ratio between 40 and 60 percent is regarded as an indicator of a moderately concentrated market (monopolistic competition);

- a ratio of less than 40 percent is regarded as an indication of a competitive market. THE HERFINDAHL-HIRSCHMAN INDEX “HHI" means the Herfindahl-Hirschman Index, a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty percent, the HHI is 2600 (302 + 302 + 202 + 202 = 2600). The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Markets in which the HHI is below 1000 points are considered to be not concentrated, between 1000 and 1800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 points are considered to be highly concentrated. Transactions that increase the HHI by more than 100 points in concentrated markets presumptively raise antitrust concerns under the Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission. See Merger Guidelines § 1.51.

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APPENDIX B. AN EXAMPLE ________________________________________________________________________________________ NAME: John Smith QUIZ # 6 Year 2002 NAICS code and the full name of the industry: 321920 Wood container and pallet manufacturing

Meaning of firm concentration code Companies

Total value of shipments ($1,000)

Total value of shipments (%)

Herfindahl-Hirschman index for 50 largest

companies All companies 2,792 5,054,000 100.0 x 4 largest companies x x 6.9 x 8 largest companies x x 10.2 x 20 largest companies x x 17.0 x 50 largest companies x x 26.8 23.8 According to the 2002 Economic Census Report, there were 2,792 companies in the “Wood container and pallet manufacturing” industry group (NAICS code 321920). The four largest firms supplied 6.9 percent of the total value of shipments in this industry. Thus, based upon the 4-firm concentration ratio, we conclude that this industry was very competitive. The HHI further supports our conclusion: the HHI = 23.8 also indicates that this industry was very competitive and not concentrated. [You can add any additional comments or information you may wish to include that are relevant to this subject matter.] Year 2002 NAICS code and the full name of the industry: 311230 Breakfast cereal manufacturing

Meaning of firm concentration code Companies

Total value of shipments ($1,000)

Total value of shipments (%)

Herfindahl-Hirschman index for 50 largest

companies All companies 45 9,102,527 100.0 x 4 largest companies x x 78.4 x 8 largest companies x x 91.1 x 20 largest companies x x 98.8 x 50 largest companies x x 100.0 2,521.3 According to the 2002 Economic Census Report, there were 45 companies in the “Breakfast cereal manufacturing” industry group (NAICS code 311230). The four largest firms supplied 78.4 percent of the total value of shipments in this industry. Thus, based upon the 4-firm concentration ratio, we conclude that this industry was an oligopoly, that is, highly concentrated and dominated by a few very large firms. The HHI further supports our conclusion: the HHI = 2,521.3 also indicates that this market was an oligopoly, that is, highly concentrated and dominated by a few very large firms. [You can add any additional comments or information you may wish to include that are relevant to this subject matter.]