Consider two alternative markets, each with three firms:
• In market A firms have shares 3/7,3/7,and1/7;90.
In market B firms have shares 3/8, 3/8,and 2/8.
a) Compute the HHI for each market. Which market is more concentrated?
b) Show that the above market shares correspond to the equilibria in the following situation:
• The three firms produce homogeneous goods for a market with demand
Q(p) =1- p ;
• Firms 1 and 2 have cost functions C (q ) = q2 and firm 3 has cost function
C3 (q3 ) = 0.5q3 ;
• In case A firms compete by independently and simultaneously setting quantities; in case B firms 1 and 2 are colluded
c) What sort of limitation on the HHI does this example suggest?