Page 616 - Krugmans Economics for AP Text Book_Neat

four- and eight-firm concentration ratios are the most commonly used. A
higher concentration ratio signals a market is more concentrated and thus is
more likely to be an oligopoly.
Another measure of market concentration is the Herfindahl-
Hirschman index, or HHI. The HHI for an industry is the square of each
firm’s share of market sales summed over the firms in the industry. Unlike
Courtesy of Henry M. Trotter ket sales among the top firms by squaring each firm’s market share,
concentration ratios, the HHI takes into account the distribution of mar-

thereby giving more weight to larger firms. For example, if an industry
contains only 3 firms and their market shares are 60%, 25%, and 15%, then
the HHI for the industry is:
2
2
2
HHI = 60 + 25 + 15 = 4,450
By squaring each market share, the HHI calculation produces numbers that are
much larger when a larger share of an industry output is dominated by fewer firms.
This is confirmed by the data in Table 57.1. Here, the indices for industries dominated
by a small number of firms, like the personal computer operating systems industry or
the wide-body aircraft industry, are many times larger than the index for the retail gro-
cery industry, which has numerous firms of approximately equal size.

table 57.1

The HHI for Some Oligopolistic Industries

Industry HHI Largest firms
PC operating systems 9,182 Microsoft, Linux
Wide-body aircraft 5,098 Boeing, Airbus
Diamond mining 2,338 De Beers, Alrosa, Rio Tinto
Automobiles 1,432 GM, Ford, Chrysler, Toyota, Honda, Nissan, VW
Movie distributors 1,096 Buena Vista, Sony Pictures, 20th Century Fox, Warner Bros., Universal, Paramount, Lionsgate
Internet service providers 750 SBC, Comcast, AOL, Verizon, Road Runner, Earthlink, Charter, Qwest
Retail grocers 321 Walmart, Kroger, Sears, Target, Costco, Walgreens, Ahold, Albertsons
Sources: Canadian Government; Diamond Facts 2006; www.w3counter.com; Planet retail; Autodata; Reuters; ISP Planet; Swivel. Data cover 2006–2007.

Monopolistic Competition

Leo manages the Wonderful Wok stand in the food court of a big shopping mall. He
offers the only Chinese food there, but there are more than a dozen alternatives, from
Bodacious Burgers to Pizza Paradise. When deciding what to charge for a meal, Leo
knows that he must take those alternatives into account: even people who normally
prefer stir-fry won’t order a $15 lunch from Leo when they can get a burger, fries, and
drink for $4.
But Leo also knows that he won’t lose all his business even if his lunches cost a bit
more than the alternatives. Chinese food isn’t the same thing as burgers or pizza.
Some people will really be in the mood for Chinese that day, and they will buy from
Leo even if they could have dined more cheaply on burgers. Of course, the reverse is
also true: even if Chinese is a bit cheaper, some people will choose burgers instead. In
other words, Leo does have some market power: he has some ability to set his own price.
So how would you describe Leo’s situation? He definitely isn’t a price-taker, so
he isn’t in a situation of perfect competition. But you wouldn’t exactly call him a

574 section 10 Behind the Supply Curve: Profit, Production, and Costs