2. The bicycle industry consists of seven firms. Firms 1, 2, 3, each has 20% of

Question

2. The bicycle industry consists of seven firms. Firms 1, 2, 3, each has 20% of market share, and Firms 4, 5, 6, 7, each has 10% market share. Answer the following questions. 2.a. (2 points) Calculate Cs for the industry. 2.b. (2 points) Calculate HHI for the industry 2.c. (2 points) Now suppose that Firms 3 and 4 merge, so that the new merged firm has a market share of 30%. Calculate the change in HHI caused by this merge. 3. (4 points) In 1986, the U.S. Congress enacted a regulation (PL99-509) requiring railroads to disclose contractual terms with grain shippers. Following the passing of the regulation, rates increased on corridors with no direct competition from barge traffic, while rates decreased on corridors with substantial direct competition. How do you interpret these events?

Explanation / Answer

2a) C4 = 3(20%) + 10%

= 0.7

2b) HHI= 3(0.22) + 4 (0.12)

= 0.12+0.04

= 0.16

2c) HHI from merge of 3 and 4 = 2(0.22)+ 2(0.32) + 3(0.12)

=0.08+0.18+0.03

= 0.29

change in HHI= 0.29-0.16

= 0.13

3) Due to the events in US and the change in HHI being greater than zero , the merger of firm 3 and 4 will be challenged in U.S.

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