Macro and Micro Economics Date Macro and Micro Economics Part 1 1. Report and interpret the 4 firm concentration ratio, the 8 firm concentration ratio and the Herfindahl Herschler Index for Wal-Mart/Retail/Pharmacy industry…
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pharmacies. TABLE 1 Note: Market shares of largest U.S. pharmacies. Adapted from “2010 Market Share of Top Retail and Specialty Pharmacies,” by Adam J. Fein, 2010. Copyright 2006-2011 by the Pembroke Consulting, Inc. To compute for the four –firm concentration ratio, add the total market shares of the four largest firms in the industry, as follows: CVS Caremark Corporation 20.1% Walgreen Company 16.2% Medco Health Solutions, Inc. 8.8% Rite Aid Corporation 6.2% Total 51.3% is the four-firm concentration ratio This means that the four largest firms in the industry have 51.3% of the market share and the remaining companies have 48.7% of the market activities. A 51.3% CR also means a low concentration. To compute for the eight –firm concentration ratio, add the total market shares of the eight largest firms in the industry, as follows: CVS Caremark Corporation 20.1% Walgreen Company 16.2% Medco Health Solutions, Inc. 8.8% Rite Aid Corporation 6.2% Wal-Mart Stores, Inc. 6.2% Express Scripts, Inc. 4.8% The Kroger Company 2.6% Safeway, Inc. 1.4% Total 66.3% This means that the eight largest firms in the industry have 66.3% of the market share and the remaining companies have 33.6% of the market activities. Another measure of market concentration is the Herfindahl-Herschler Index (HHI) which is computed by squaring the market share of each firm competing in the industry and then summing the resulting numbers (AmosWEB, 2011). In the case of the pharmaceutical industry, one can calculate an approximation of the HHI by using the market share figures of the eight largest firms as follows: HHI = (20.12+16.22+8.82+6.22+6.22+4.82+2.62+1.42) = 852.53 An HHI of zero means perfect competition while an HHI of 10,000 or higher means complete monopoly (AmosWEB, 2011). Since the HHI of the top eight firms resulted in 852.53, it means that there is low concentration in the industry. The HHI figure is consistent with the eight-firm concentration ratio which also shows a low concentration for the industry. Part 2 1.Explain the importance of competition among firms. Competition among firms is important because with competition, “the economy's resources are put to their best use by encouraging enterprise and efficiency, and widening choice…and strong incentives for good performance” (Riley, 2006). Arguments against Merger In the perspective of the public, they may not agree to the possible merger of Wal-Mart and Rite Aid because it might create an oligopoly instead of creating a healthy competition among the top pharmaceutical companies in the industry. They fear that the pharmaceutical companies might collaborate to charge monopoly price and get monopoly profits which is to their detriment (tutor2u, n.d.). Arguments In Favor of Merger The possible merger between Wal-Mart and Rite Aid Corp. represents the joining of forces of two of the largest U.S. pharmaceutical companies. For Wal-Mart, it would mean an increase in their presence in populated urban areas like New York, which according to some analysts could easily increase Wal-Mart revenues overnight by 10% (Massey, 2011). Similarly, Rite Aid will also benefit from the merger because Wal-Mart can help solve the company’s financial woes, including the shutting down of 345 of its outlets since 2008 and a declining market share since 2007 (Massey, 2011). 2.Explain whether the competitive environment in this industry benefits society or not. A competitive environment in the pharmaceutical industry will benefit society because the companies can compete
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