Question

10 Question 41 (10 Marks) Given: LUXURY CAR MARKET - CANADA Porche Volvo Acura 4% 3% 8% Mercedes 18% Audi 18% Lincoln Lexus 13% BMW 17% Jaguar 4% Infinity 5% Cadillac 6% Answer the questions below (No shortcuts): What is the 4-Firm Concentration Ratio? (3.33 marks) % What is the Herfindahl Index? (3.33 marks) What type of market is this most likely to be? (3.33 Marks) (Possible Choices: Monopoly Oligopoly, Perfect Competition, Monopolistic Competition)

Answer 1

1. The four-firm concentration ratio (CR4) is the share of the top four firms (with maximum sales/market size) in an industry.

Here, the top four firms are : Mercedes (18%), Audi (18%), BMW (17%), Lexus (13%)

The ratio is given as sum of sales (or market size) from the top four firms divided by the total sales (or market size).

CR4 = (18+18+17+13)/100 = 66/100 = 0.66

That is, CR4 = 0.66 x 100 = 66%

Since CR4 = 66 percent, the top four firms capture 66% of the total sales (or market size).

2. The Herfindahl-Hirschman Index is a commonly used market concentration ratio. It is the square of the sum of market share of all firms in an industry. It ranges from a number close to zero to as high as 10,000 where zero indicates perfect competition (with each firm capturing a similar market share) and a 10,000 indicates a monopolistic market (with one firm capturing almost all the market).

HHI = 18²+18²+17²+13²+8²+6²+5²+4²+4²+4²+3²
HHI = 324 + 324 + 289 + 169 + 64 + 36 + 25 + 16 +16 +16 + 9 = 1288

Therefore, the Herfindahl-Hirschman Index stands at 1,288

3. A CR4 of less than 40 percent indicates that the top four firms capture no major market share while a greater than 40 percent indicates a good chunk of market share being in the hands of the top four firms. As soon as this ratio reaches hundred, it indicates a single firm capturing the total sales in the market. A CR4 of 66% is an indication of the top four firms capturing a quite high share in total market and, hence, indicate an oligopolistic market structure.

An HHI of 1,500 to 2,500 is an indication of a moderately concentrated market. Here, the HHI is at 1,288 which indicates less concentration in the market. However, the number is not low enough to indicate the presence of perfect competition.

Hence, with HHI also indicating a mild concentration in the market, it is supportive of the presence of an oligopolistic market structure in the luxury car market in Canada.

Correct Answer : Oligopoly