In The 1990s Five Firms Supplied Amateur Color Film
In The 1990s Five Firms Supplied Amateur Color Film In The United Stat
In the 1990s, five firms—Kodak, Fuji, Konica, Agfa, and 3M—supplied amateur color film in the United States. From a technical perspective, the quality of the color film produced by these firms was relatively similar, yet Kodak maintained a dominant market share of 67 percent. Despite minimal differences in product quality, Kodak’s market power can be described through economic measures such as the Rothschild index and the Lerner index.
Given this scenario, the average retail price of a roll of Kodak film was $6.95, with a marginal cost of $3.475 per roll. Additionally, the own price elasticity of demand for Kodak film was –2.0, and the market demand elasticity was –1.75. Using these data points, it is possible to calculate the Rothschild index, which measures the degree of market concentration, as well as the Lerner index, which indicates the firm's pricing power.
The Rothschild index is a measure of the degree of market concentration and is calculated as:
\[
\rho = \frac{E}{E_m}
\]
where \(E\) is the own price elasticity of demand for the firm (here, Kodak), and \(E_m\) is the market elasticity of demand. Under this formulation, the index reflects how close the firm's elasticity is to that of the overall market.
Given:
- \(E = -2.0\)
- \(E_m = -1.75\)
Calculating:
\[
\rho = \frac{|-2.0|}{|-1.75|} = \frac{2.0}{1.75} \approx 1.14
\]
Since the Rothschild index is typically expressed as a positive number, the result is approximately 1.14. This suggests that Kodak’s market power is moderate; the index near 1 indicates a market with some concentration but not excessively so.
The Lerner index quantifies a firm's market power and is given by:
\[
L = \frac{P - MC}{P}
\]
where:
- \(P = 6.95\), the retail price
- \(MC = 3.475\), the marginal cost
Calculating:
\[
L = \frac{6.95 - 3.475}{6.95} = \frac{3.475}{6.95} \approx 0.50
\]
Thus, Kodak’s Lerner index is approximately 0.50, indicating that the firm has significant pricing power, as it can set a price roughly 50% above marginal cost. This level of market power is consistent with Kodak’s dominant market share in the 1990s.
In sum, the calculated Rothschild index of approximately 1.14 suggests a moderately concentrated market, while the Lerner index of about 0.50 reveals that Kodak held considerable market power in setting prices during that period. These measures help illustrate how market dominance can be analyzed through elasticity and pricing metrics, offering insights into competitive dynamics within the photographic film industry of the 1990s.
Paper For Above instruction
The financial dominance of Kodak in the 1990s photographic film industry exemplifies market power analysis through the application of the Rothschild and Lerner indices. Despite the apparent similarity in product quality among competitors, Kodak's substantial market share of 67% underscores its influence over pricing and market structure. To understand this dominance quantitatively, we analyze the market using these economic indices, which provide insights into both market concentration and firm pricing power.
The Rothschild index, introduced by Rothschild (1974), measures the degree to which an individual firm's elasticity of demand approaches that of the entire market. An elasticity of demand indicates how sensitive consumers are to price changes; the more elastic the demand, the less market power the firm possesses. In this context, the own price elasticity of demand for Kodak was reported as -2.0, indicating consumers' responsiveness to price increases; a 1% price hike would reduce quantity demanded by 2%. The market elasticity being -1.75 suggests overall demand's responsiveness is slightly less sensitive than Kodak's own demand.
The calculation of the Rothschild index involves dividing the firm's elasticity magnitude by the market demand elasticity magnitude:
\[
\rho = \frac{|E|}{|E_m|} = \frac{2.0}{1.75} \approx 1.14
\]
A Rothschild index above 1 indicates that Kodak's demand is more elastic and points to some degree of market power concentration. This value of approximately 1.14 suggests that despite competition, Kodak's position allowed it to exert considerable influence on prices, consistent with its 67% market share. The index's proximity to 1 indicates moderate market power—large but not an absolute monopoly.
The Lerner index, developed by economist Abba Lerner (1934), directly measures the degree of market power by comparing the firm's price to its marginal cost:
\[
L = \frac{P - MC}{P}
\]
Using the given data, where \(P = 6.95\) dollars and \(MC = 3.475\) dollars, the Lerner index computes as:
\[
L = \frac{6.95 - 3.475}{6.95} \approx \frac{3.475}{6.95} \approx 0.50
\]
A Lerner index of 0.50 suggests that Kodak could price its products at a markup of approximately 50% over marginal cost. This significant markup confirms the firm's substantial market power and pricing discretion, aligning with its dominant market position.
These indices thus reinforce the understanding that Kodak, despite technical similarity among competitors, wielded considerable market power—though not monopolistic—through its sizeable market share and willingness to set prices well above marginal costs. Such economic measures are crucial in assessing the extent and implications of market dominance, especially in oligopolistic industries like photographic film during the 1990s. They also highlight how elasticity analyses provide insights beyond simplistic market share figures, offering a nuanced picture of competitive dynamics and market power.
Overall, these calculations exemplify how economic tools like the Rothschild and Lerner indices serve as vital indicators in the analysis of market structure, firm behavior, and competitive strategies within a given industry.
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