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The pie chart below shows the market share of the Global Aircraft Market in 2018 - Leaving Cert Economics - Question 11 - 2021
Question 11
The pie chart below shows the market share of the Global Aircraft Market in 2018. (a) (i) Using the data provided above, calculate the Herfindahl Hirschman Index (H... show full transcript
Worked Solution & Example Answer:The pie chart below shows the market share of the Global Aircraft Market in 2018 - Leaving Cert Economics - Question 11 - 2021
Step 1
Using the data provided above, calculate the Herfindahl Hirschman Index (HHI) for the Global Aircraft Market in 2018. Show your workings.
Answer
To calculate the Herfindahl Hirschman Index (HHI), we use the formula:
Using the market shares provided:
- Boeing: 46%
- Airbus: 46%
- Embraer: 5%
- Bombardier: 1%
- Others: 2%
Substituting these values into the formula, we get:
Therefore, the HHI for the Global Aircraft Market in 2018 is 4262.
Step 2
Would you consider this market to be competitive, moderately concentrated, or highly concentrated? Explain your answer.
Answer
This market is considered to be highly concentrated for the following reasons:
- The calculated HHI is greater than 2500, indicating a high level of market concentration.
- 92% of the market share is held by just two firms (Boeing and Airbus), which suggests limited competition among a few dominant players.
Step 3
Step 4
Would you advise the above firm to engage in price competition? Give two reasons for your answer.
Answer
No, I would not advise the firm to engage in price competition for the following reasons:
- Fear of a price war: If the firm decreases their price, other rivals may also decrease their prices, leading to a price war that can harm profitability for all firms involved.
- No increase in total revenue: Decreasing price in an inelastic demand curve would likely result in a decrease in total revenue for the firm, as the loss in revenue from lower prices may not be compensated by increased sales volume.
Step 5
Outline two reasons why small firms such as Embraer and Bombardier may survive in this market.
Answer
- Personalized/Exclusive nature of the aircraft required: Small firms may offer personalized attention and specialized services that cater to specific needs of their customers, a strategy that large firms may not efficiently provide.
- Niche Market: The restricted size of the market may allow smaller firms to operate effectively in specialized segments that are not attractive to larger firms, thus creating a viable business opportunity.