Suppose an industry is composed of six firms. Four firms have sales of $100,000

Question

Suppose an industry is composed of six firms. Four firms have sales of $100,000 each, and two firms have sales of $50,000 each.

a. Explain how concentration ratios are calculated. Determine the concentration ratios in the market.

b. Explain how the Herfindahl-Hirschmann index is constructed. Determine the Hefindahl-Hirschmann index for that industry.

c. Based on the FTC and DOJ Horizontal Merger guidelines, do you think that the FTC would attempt to block a horizontal merger between two firms with sales of $100,000 and $50,000? Explain.

d. Explain how the FTC decides on whether to challenge a proposed merger? What other aspects does the agency consider in addition to the HHI and market concentration ratios? Use the link below to prepare your answers. http://www.ftc.gov/reports/ethanol/2007ethanol.pdf

Explanation / Answer

In the question given,

Total industry sales = 100,000*4+50,000*2=$500,000

Since the first four firms have the largest sales

Market share(%) of each of the largest four firms= 100,000/500,000=20% each

Therefore concentration ratio=20%+20%+20%+20%=80%

         Herfindahl-hirschmann index =(market share)2

          Market share of first four firms = 20% each

          Market share of last two firms = 50,000/500,000=10%

          Herfindahl-hirschmann index=(202)*4+(102)*2=1800.

          Herfindahl-hirschmann index=(302)+(202)*3+(102)=2200

          Since the original index value was 1800 and due to the merger the change in value of index is more           than 50,therefore FTC may suspect potential concentration of market share and may try to block the merger.

While HHIs provide information about market concentration, they are only the starting point for the competitive analysis undertaken by the Commission and the U.S. Department of Justice. Both agencies make their enforcement decisions based on several factors in addition to HHIs, such as ease of entry and competitive effects.

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