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Are existence of profits / higher rates of return a sure sign of market power and DWL inefficiency? Imagine two industries: Industry A: All firms
Are existence of profits / higher rates of return a sure sign of market power and DWL inefficiency?
Imagine two industries:
Industry A: All firms use a common technology with the cost function c(q) = 50 + 10q + 2q2.
Industry B: Most firms use a common technology with the cost function c(q) = 50 + 10q + 2q2, but two firms have, for some unexplained reason, a superior technology c(q) = 10 + 10q + q2.
The market demand is given by Q(P) = 80 P in both industries.
Your task is to compare the long run equilibrium in these industries:
A. Which industry will have a higher profit/revenue ratio (which is used as a proxy for the market
power index L when only industry totals for profit and revenues are available) B. In which industry do we have higher concentration as measured by HHI?
C. How is the profit/revenue ratio which is a proxy for L (as defined in part a above) correlated with HHI across these two industries?
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