Why are the concepts of own and cross-price elasticities of demand essential

| November 24, 2016

Homework for Chapter 5 (modified questions from the end of the chapter)

[13 points possible]

1. Why are the concepts of own and cross-price elasticities of demand essential to competitor identification and market definitionfor companies in the foodindustry?(2 points possible)

3. How would you characterize the nature of competition among small food companies? Are there submarkets with distinct competitive pressures? Are there important substitutes that constrain pricing? Given these competitive issues, how can anorganic frozen foodsproducer be profitable?(3 points possible)

4. How does industry-level price elasticity of demand shape the opportunities for making profit in an industry? How does the firm-level price elasticity of demand shape the opportunities for making profit in an industry?(2 points possible)

7. Numerous studies have shown that there is usually a systematic relationship between concentration and price. What is this relationship? Offer two brief explanations for this relationship.(2 points possible)

9. The following, adapted from a merger case in 2014, were the approximate U.S. market shares of different cigarettecompanies: Altria, 47 percent;Reynolds American, 26 percent; Lorillard, 14 percent; Imperial, 5 percent; total for all other brands, 8 percent.Assume “all other brands” each have less than a one-percent share.

(a) Compute the Herfindahl for this market, showing how you arrived at this number. (1 point possible)

(b) Suppose thatReynolds American were to acquire Lorillard, as it has – BUT suppose Reynolds American did not sell off anyLorillard brands [unlike the actual deal].Compute the post-merger Herfindahl, showing how you arrived at this number. (1 point possible)

(c) Would federal antitrust agencies belikely to become concerned to see a Herfindahl increase of the magnitude you computed as[(b)- (a)], as well as the projected SSNIP, and challenge the merger?Explain why or why not. (2 points possible)

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