Question

Consider a market with four firms. Suppose the first firm has a 54% market share, the second firm has a 30% market share, the third firm has a 10% market share and the fourth firm has a 6% market share. Using the Herfindahl-Hirschman Index (HHI), what is this markets level of concentration?. (Enter a numeric response using an integer.) Now suppose the third and fourth firms propose to merge. Were they to merge, then the market's HHI would increase to Given the increase in the HHI that would be caused by the proposed merger, would the government likely allow such a merger to occur?

Answer 1

Answer:

Since, mergers that raises the HHI by more than 200 points will be objected by the DOJ, here HHI is increased by 120. Hence it would be allowed by the government. So its a yes.

Explanation:

We have four firms with given shares in the market as 54%, 30%, 10% and 6%. Use the HHI index to find the concentration of power in the market. Industry with Herfindahl-Hirschman index (HHI) value being lower than 1500 is considered unconcentrated.

HHI = Sum of squares of market shares.

HHI = 54^2 + 30^2 + 10^2 + 6^2 = 3952

When thrid and fourth firm are merged, new HHI is

HHI = 54^2 + 30^2 + 16^2 = 4072

New HHI is increased to 4072.