You are the manager in a market composed of 5 firms, each of which has a 20.00 p

Question

You are the manager in a market composed of 5 firms, each of which has a 20.00 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors.

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. Each of the 5 firms have 20% share.

HHI = 0.202 + 0.202 + 0.202 + 0.202 + 0.202 = 0.04 +0.04 +0.04 +0.04 +0.04 + = 0.20 or 2,000 (multiplying by 100*100)

B. 3 firms will have 20% and 1 will have 40% share.

HHi = 0.402+ 0.202 + 0.202 + 0.202 = 0.16 + 0.04 + 0.04 + 0.04 = 0.28 or 2,800 (multiplying by 100*100)

C. As the HHI has increased by 800 and crossed the moderately concentrated market limit (from 1500 to 2500), it is likely to be blocked by the Justice Department. Justice Department considers only change of upto 100 to be a small change, 800 is a pretty big change as per the guidelines.

Correct choice - C. It likely will (block the merger)

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