Quiz 18: Public Finance: Expenditures and Taxes

Business

(a) Sunny Valley's market share in blueberries is 90%; yes. (b) If the relevant market is all berries, then Sunny Valley's market share iS30.0%; no. (c) If the relevant market is all fruit, then Sunny Valley's market share is 61%; likely. Feedback: Consider the following example. Annual sales are 1 million tons of blueberries, 5 million tons of strawberries, anD10 million tons of bananas. Suppose that of those total amounts, the Sunny Valley Fruit Company sells 900,000 tons of blueberries, 900,000 tons of strawberries, and 7.9 million tons of bananas. Part a: What is Sunny Valley's market share if the relevant market is blueberries If a court applies the "90 60 30 rule" when considering just the blueberry market, would it rule that Sunny Valley is a monopoly Courts often decide whether or not market power exists by considering the share of the market held by the dominant firm. They have roughly adhered to a "90-60-30 rule" in defining monopoly: If a firm has a 90 percent market share, it is definitely a monopolist; if it has a 60 percent market share, it probably is a monopolist; if it has a 30 percent market share, it clearly is not a monopolist. The market share will depend on how the market is defined. Sunny Valley's market share is 90% if the relevant market is blueberries. Annual sales of blueberries are 1 million tons and Sunny Valley sells 900,000 tons of blueberries in the market ((900,000/1,000,000) x 100)=90%). Based on the 90-60-30 rule, Sunny Valley would be ruled a monopolist. Part b: What is Sunny Valley's market share if the relevant market is all types of berries Would the court rule Sunny Valley to be monopolist in that market Sunny Valley's market share iS30% if the relevant market is all berries. Annual sales of blueberries are 1 million tons and annual sales of strawberries are 5 million tons. Sunny Valley sells 900,000 tons of blueberries in the market and sells 900,000 tons of strawberries in the market.( ((900,000  blueberries + 900,000 strawberries) / (1,000,000 blueberries market + 5,000,000 strawberries market)) x 100 = (1,800,000 berries  / 6,000,000 berries market) x 100 = 30%). Based on the 90-60-30 rule Sunny Valley would not be ruled a monopolist. Part c: What if the relevant market is all types of fruit What is Sunny Valley's market share and would the court consider Sunny Valley to be a monopolist Sunny Valley's market share is 61% if the relevant market is all types of fruit. Annual sales of blueberries are 1 million tons, annual sales of strawberries are 5 million tons, and annual sales of bananas are 10 million tons. Sunny Valley sells 900,000 tons of blueberries in the market, sells 900,000 tons of strawberries in the market, and sells 7.9 million tons of bananas.( ((900,000 blueberries + 900,000 strawberries + 7,900,000) bananas / (1,000,000  blueberries market + 5,000,000 strawberries market + 10,000,000 bananas market)) x 100 = (9,700,000 fruit / 16,000,000 fruit market) x 100 = 60.063% or 61%). Based on the 90-60-30 rule Sunny Valley would likely be ruled a monopolist.

Antitrust policies prohibit firms, businesses, industries from activities that create a monopoly in the market. These policies are important because it promotes healthy competition and saves the consumers from exploitation. The economic wealth of the society is reduced by the monopolies as they charge prices that give them maximum profit. Government regulates these by regulating prices that they can charge, operating monopolies as public enterprise and easing the barriers to entry through antitrust laws. Both, the policy and regulation works against monopoly. But, they are implemented in different scenarios. Antitrust policy is basically used to prevent practices that promote monopoly in the market. It promotes competition by discouraging mergers or by taking action against the firms that abuse the monopoly power. Regulation is generally done on natural monopolies. The government analyzes the impact of firm's action on the consumers and the market and takes necessary action accordingly.

(a) As you know that the Herfindahl index is defined as: img , with S1 , S2 , …, S n denoting the percentage market share of firmS1, 2, …, n, respectively. Thus, substituting in the market shares of each of the six touches screen makers, we have: img (b) The two smallest firms in this industry have market shares of 13% anD14%. Suppose these two firms merged and created a firm that, as a result of the merger, haS27% of the market share. Then, we can recalculate the Herfindahl index, this time with only 5 firms (the other four firms and the one merged firm). img We see that even with the smallest two firms merging, the market looks pretty balanced between the five remaining firms. The Herfindahl index is also not very high, thus, the government will probably not challenge the proposed merger. (c) With the information that we are given, it does not seem as though the Herfindahl index in the touchscreen market will change. Since the two companies that are merging are computer companies, the touchscreen market will not be affected. However, there could be a case where one of the companies are used to working with one of the touchscreen firms, in which case, the Herfindahl index will go up because a touchscreen firm will gain more market share. However, we are not given more information than two computer firms merging, so we will not know how much the Herfindahl index will change without more information.

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