The U.S. Department of Justice (DoJ) uses the Herfindahl index to evaluate the i

Question

The U.S. Department of Justice (DoJ) uses the Herfindahl index to evaluate the impact of a proposed horizontal merger between firms on the degree of market concentration.

You consider an industry with 15 firms. Their market shares are as follows:

Company Market Share

A 25%

B 20%

C 15%

D 10%

E 5%

There are 10 identical firms in the industry. Compute the Herfindahl index.

(H <.10 means low concentration, H up to .14 is moderate concentration, H>.18 means high concentratoin)

a. Companies A and B merge, calculate the pre and post-merger Herfindahl index. What should the reaction of the DoJ be according to the Agency standards?

b. Companies A and D merge, calculate the pre and post-merger Herfindahl index. What should the reaction of the DoJ be according to the Agency standards?

c. Companies A and E merge, calculate the pre and post-merger Herfindahl index. What should the reaction of the DoJ be according to the Agency standards?

Explanation / Answer

Pre merger

(0.252+0.202+0.152+0.102+0.052+) + (0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252) = 0.144 (14.4%)

Post merger

(0.452+0.202+0.152+0.102+0.052+) + (0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252) = 0.2438 (24.38%)

Post merger, the index comes to high concentration.

This merger will come to notice and the merger and may not advice it to take place. It will increase the hold of the merged company in the market and the department would not like it to happen.

Pre merger

(0.252+0.202+0.152+0.102+0.052+) + (0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252) = 0.144 (14.4%)

Post merger

(0.352+0.202+0.152+0.052+) + (0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252) = 0.193 (19.3%)

The merger is still increasing the index but it is considered as potentially rise the competition in the market.

Pre merger

(0.252+0.202+0.152+0.102+0.052+) + (0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252) = 0.144 (14.4%)

Post merger

(0.302+0.202+0.152+0.102+) + (0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252+0.0252) = 0.168 (16.8%)

The concentration increase is considered nominal and even in highly concentrated markets post-merger, are unlikely to have adverse competitive consequences and ordinarily require no further analysis.

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