The following, adapted from a merger case in 2014, were the approximate U.S. mar

Question

The following, adapted from a merger case in 2014, were the approximate U.S. market shares of different cigarette companies: Altria, 47 percent; Reynolds American, 26 percent; Lorillard, 14 percent; Imperial, 5 percent; total for all other brands, 8 percent. Assume “all other brands” each have less than a one-percent share.

(a) Compute the Herfindahl for this market, showing how you arrived at this number.

(b) Suppose that Reynolds American were to acquire Lorillard, as it has – BUT suppose Reynolds American did not sell off any Lorillard brands [unlike the actual deal]. Compute the post-merger Herfindahl, showing how you arrived at this number.

(c) Would federal antitrust agencies be likely to become concerned to see a Herfindahl increase of the magnitude you computed as [(b) - (a)], as well as the projected SSNIP, and challenge the merger? Explain why or why not.

Explanation / Answer

(a)

HHI = 472+ 262+ 142+ 52+ 82HHI = 2209 + 676 + 196 + 25 + 64HHI = 3170

(b)

HHI = 472+ 402+ 52+ 82HHI = 2209 + 1600 + 25 + 64HHI = 3898

(c)

Post-Merger HHI below 1,000 shows unconcentrated markets, therefore mergers are not challenged.Since the Reynolds/Lorillard as described above has a HHI change of 728 defined by (3898-3170 = 728), then this merger may not be challenged by antitrust agencies.

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