You are the manager in a market composed of 13 firms, each of which has a 7.69 p

Question

You are the manager in a market composed of 13 firms, each of which has a 7.69 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors.

Instruction: Round your answers to the nearest penny (two decimal places).

a. Calculate the premerger Herfindahl-Hirschman index (HHI) for this market.

b. Suppose that any two of these firms merge. What is the postmerger HHI?

c. Based only on the information contained in this question and on the U.S. Department of Justice Horizontal Merger Guidelines described in this chapter, do you think the Justice Department would attempt to block a merger between any two of the firms?

Explanation / Answer

a. HHI is the sum of squares of the market share of the firms in a particular market
Thus, HHI = 13*(7.69*7.69) = 768.77 (On the scale of 10,000)

b. After merger, one of the firms will have 7.69*2 = 15.38% share
Thus, HHI = 11*(7.69*7.69) + 15.38*15.38 = 650.4971+ 236.5444 = 887.04

C. As the HHI post merger is still much less than the threshold of 2500, it is still highly competitive market, and the Justice Department would most likely not block the merger. Thus answer is C. It likely will not

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