Measures of firm market power

This activity is appropriate for the Microeconomic Principles course.
Students should have prior knowledge about characteristics of various market structures.
No limit on class size.
One 50-minute class period would be sufficient for this activity.

Overview

This activity requires students to examine the luxury handbag market and identify the market structure embodied by luxury handbag firms operating in this market. A Planet Money podcast is assigned prior to class which provides details of the functioning of Hermes and its product- the Birkin bag. In class students will discuss the podcast and answer questions in the context of the podcast. The activity will reinforce their understanding of specific market structures and their characteristics.

Expected Student Learning Outcomes

Upon successful completion of this learning activity, students will be able to:
· Evaluate various approaches to measuring market concentration.

Information Given to Students

Students are required to listen to Planet Money podcast "Bagging the Birkin" prior to class.
Activity:
You are a team of economists at the FTC and have the task of advising the Director about whether to launch an antitrust investigation into the luxury handbag industry.
Which of the following measures would be the most useful for determining whether or not to investigate? (Assume you have access to the necessary data.)
A. Four-firm concentration index.
B. Markup of price over marginal cost (Lerner's Index)
C. Elasticity of demand facing each firm in the industry.
D. Herfindahl-Hirschman Index.

Assessment SLO Question Diagram (Microsoft Word 2007 (.docx) 75kB Aug31 22) 

The podcast needs to be assigned before class. Students should have prior knowledge of characteristics of various market structures. The activity requires students to rank explanatory factors to demonstrate their understanding of firms operating in a concentrated market.
The instructor can ask students how they define the handbag market. Identify why the HHI captures more about the market characteristics than does the 4-firm concentration index. The instructor might be advised to discuss with students the practical problems of obtaining the desired data and often having to do the best that can be done with available data.
All four options are plausible and discussion worthy. The instructor can hone in on options C and D to best support the monopolistic nature of the luxury handbag market (especially for Hermes Birkin).
As the discussion matures with Monopolistic versus Oligopolistic market structures, allow groups to list the market characteristics, and compare and contrast for various luxury handbag firms that may operate in either of these markets.
The following follow-up questions are recommended for facilitating the debriefing conversation:
1. What market structure does the Hermes Birkin bag operate in? Explain the characteristics that support your answer.
2. How would you describe the market structure of handbags in general? Explain your answer.
3. Comment on elasticity of demand for Hermes Birkin bag, and costs of producing the bag (FC, VC, and MC).
Closing remarks: It is vital to discuss market concentration and elasticities of demand as characterized by luxury handbag firms. To conclude the activity the instructor can provide examples of products in other markets such as the automobile market.

Some of the key players profiled in the luxury handbag market include LVMH, Furla SpA, Marcolin Group, De Rigo, Longchamp, Luxottica Group, Mulberry Group, Safilo Group, Vera Bradley, Guccio Gucci S.p.A, Luxottica Group, Vera Bradley, Inc, and Samsonite International S.A./Tumi brand. The key factors driving the luxury handbag market growth are the rise in the number of working women, penetration of high-end brands through social media platforms. In addition, rising spending among the developing nations has further contributed towards the market growth.

Provide an example of a market where HHI is closer to 10,000 and another where it is less than 1,000.

https://www.npr.org/sections/money/2017/11/10/563342363/episode-672-bagging-the-birkin