The task here is to calculate Herfindahl-Hirschman Index for year 2015 and the p
ID: 1160516 • Letter: T
Question
The task here is to calculate Herfindahl-Hirschman Index for year 2015 and the present year. Describe how HHI has changed. Then, create a scenario where Time Warner Cable and Dish network merge and recalculate HHI. Evaluate the change in HHI and make a recommendation about the risk of FTC intervention in this potential merger. You need to evaluate market concentration.
Service Households (2015) Households (Current Survey) Time Warner Cable 75,625 74,520 At&T U-Verse 56,815 58,140 Dish Network 14,940 14,650 Direct TV 19,650 19,850 Google Fiber - 1,150 Households with Service 167,030 168,310 No Service* 16,650 17,520 Total Households 183,680 185,830Explanation / Answer
To assess the market power one best way is to measure the concentration within a particular market. The concentration is measured by the means of the concentration ratio. The concentration ratio is given by the percentage of output produced by the four largest firms in an industry. The higher the concentration ratio the greater will be the concentration in the industry.
However, both the Justice department and the FTC both prefer to measure called the Herfindahl-Hirschman Index (HHI). The HHI is measured by taking the square for each firm’s share of market sales summed over the firms in the industry. An HHI below 1000 is very competitive, HHI between 1000 and 1800 are somewhat competitive and HHI above 1800 is called oligopoly.
The table below gives the HHI for communication market:
HOUSEHOLD MARKET PERCENTAGE
2015 Current 2015 Current
TWC 75625 74520 45.3 44.3
AT&T 56815 58140 34.0 34.5
DN 14940 14650 8.9 8.7
DT 19650 19850 11.8 11.8
GF 0 1150 0.0 0.7
TOTAL 167030 168310
HHI 3425.4 3368.4
Thus the HHI for both period is quite high and above 1800. Then the market is an oligopoly.
The marger of the said firms changes the market as
HOUSEHOLD MARKET PERCENTAGE
2015 Current 2015 Current
TWC+DN 75625 74520 45.28 52.98
AT&T 56815 58140 34.01 34.54
DN 14940 8.94
DT 19650 19850 11.76 11.79
GF 0 1150 0.00 0.68
TOTAL 167030 168310
HHI 3425.36 4139.18
The HHI increases to 4139. This increases concentration to 40%. Then the marger is near monopoly. The marger should be prevented and this calls for a FTC intervention in this potential merger.
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