QUESTION 9.1 The wholesale and retail book markets in the United States have a fair amount of concentration. The three largest book retailers (Barnes and Noble, Borders, and Books-A-Million) all buy their books from Ingram. The market share (MS) of these firms and the average cost (AC) of their operations (relative to the list price of a book) is shown in the table below:

Wholesale Books Retail Books Firm MS ACa Firm MS AACb Ingram 0.30 0.40 Barnes and Noble 0.15 0.25 Baker and Taylor 0.20 0.45 Borders 0.10 0.20 Bookazine 0.10 0.60 Books-AMillion 0.05 0.25 Others (8 Firms) 0.05 each 0.7125 Others (60 firms) 0.01 each 0.362 NOTES:

a. Average cost is measured as a percentage of the list price of the book.

b. This is the additional average cost (AAC) so the total average cost would be the input price for a book plus the AAC. From this we can infer that the minimum point of the average cost (AC) function occurs when a firm has 30% of the wholesale book market. Furthermore, the minimum point of the additional average cost function (AAC) occurs when a firm has 10% of the retail book market.

a. Calculate the HHI and C4 indices for the wholesale book and retail book markets. N

b. If the current wholesale market price for a book is 50% the list price, what is the profit margin for the 11 book wholesalers? N Would the HHI for the wholesale book market increase or decrease in the long-run? Explain.

c. What is the profit margin for each of the 63 book retailers if the retail market price was 80% the list price (still assuming a wholesale market price of 50% of the list price)? N What would we expect to see happen in the retail book market in the long-run?

d. If Baker and Taylor merged with Bookazine, what would the change in HHI be for the wholesale book market? N Do you think the U.S. government would approve this merger? Explain.