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-AMillion) 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:

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.

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