PROBLEMS & EXERCISES
SOLUTIONS & DISCUSSION
UNIT THREE (FOR EXAM 3)
Unit Three: Assignment 1: Problem 12 from page 655
12. In the late 1990s, Kelloggs, which controlled 32 percent of the breakfast cereal market, cut the prices of some of its best selling brands of cereal to regain market share lost to Post, which controlled 20 percent of the market. General Mills had 24 percent of the market. The price cuts were expected to trigger a price war. Based on this information, what market structure best characterizes the market for breakfast cereal?
Without question, the market structure is oligopoly. Based on the information provided, calculate the CR4 (even though data for only three firms is provided). Then calculate the Herfindahl index. Although we do not have a complete set of data, we have enough to make a partial determination and easily infer the market structure.
CR4 = 32 + 24 + 20 = 76, which is a strong indication of oligopoly. Just the top three firms hold a 76% market share.
Herfindahl Index:
| 32 x 32 = |
1024 |
| 24 x 24 = |
576 |
| 20 x 20 = |
400 |
| TOTAL= |
2000 |
The Herfindahl index of 2000 strongly suggests oligopoly.
