1. Nature of Industry

2. Learning Objectives: What is industry/market structure?
How do we measure industry concentration?
What are different types of mergers?

3. Market Structure Number of firms Relative firm sizes Product demand
Technology of production
Cost structures
Ease of entry and exit

4. Industry Concentration
Four-firm concentration ratio (FFCR)
𝐶 4 = 𝑆𝑎𝑙𝑒𝑠 1 + 𝑆𝑎𝑙𝑒𝑠 2 + 𝑆𝑎𝑙𝑒𝑠 3 + 𝑆𝑎𝑙𝑒𝑠 4 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙
FFCR will vary between 0 (less concentrated) and 1 (highly concentrated).
Herfindahl-Hirschman index (HHI)
𝐻𝐻𝐼=10,000∗ 𝑖=1 𝑛 𝑤 2 𝑖 , 𝑤ℎ𝑒𝑟𝑒 𝑤 𝑖 = 𝑆𝑎𝑙𝑒𝑠 𝑖 𝑆𝑎𝑙𝑒𝑠 𝑇 & 𝑖=1,…,𝑛
As n∞, HHI0; as n1, HHI10,000
Example: SARFT Regulation 17 and China's Beer Market, 2004

5. Measure of Demand Conditions
Rothschild Index
𝑅= 𝜀 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝜀 𝐹𝑖𝑟𝑚
Rothschild index can vary between 0 and 1.
Higher availability of substitutes for a product means Rothschild index will be closer to zero.

6. Pricing Behavior Lerner Index 𝐿= 𝑃−𝑀𝐶 𝑃
Lerner index can vary between 0 (lower mark up) and 1 (higher mark up).
Lerner index is a measure of a firm’s mark up.
More competitive market means Lerner index will be closer to zero.

7. Integration and Merger
Industry structure changes when either of these takes place
Vertical merger
Horizontal merger
Conglomerate merger
Example: Scale and Scope at Citigroup
Example: Mahindra-Satyam
Example: Too big too fail
Example: AT&T & T-Mobile proposed merger blocked by FTC
Example: Jet Airways Etihad strategic alliance
Example: Sony and Loews

8. Profit versus Social Welfare
Which objective to be maximized?
Example: Uber Caps Surge Pricing During Juno Snowmageddon (Because It Sort Of Has To)