ANSWER PROBLEM C 9. The following, adapted from a merger case in 2014, were the

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ANSWER PROBLEM C

9. 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. (1 point possible)

47% + 26% + 14% + 5% + 8%

47 + 26 + 14 + 5 + 8 à Square each integer (47^2 + 26^2 + 14^2 + 5^2 + 8^2)

2209 + 676 + 196 + 25 + 64 = 3170

(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. (1 point possible)

47% + (26% + 14%) + 5% + 8%

47 + 40 + 5 + 8 à Square each integer (47^2 + 40^2 + 5^2 + 8^2)

2209 + 1600 + 25 + 64 = 3898

(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. (2 points possible)

PLEASE ANSWER PROBLEM C.

C. Merger Standards: The Department of Justice and the FTC use the HHaclation for a market to evaluate proposed horizontal mergers. Postmerger HHI below 1,500 ° These markets are not concentrated, so mergers in them are not challenged. Postmerger HHI between 1,500 and 2,500 These markets are moderately concentrated. Increase in HHI by less than 100 probably will not be challenged. Increase in HHI by more than 100 may be challenged. Postmerger HHI above 2,500 These markets are highly concentrated. Increase in HHI by less than 100 points will not be challenged. Increase in HHl by 100 to 200 points may be challenged. Increase in HHl by more than 200 points will likely be challenged.

Explanation / Answer

C. Post-Merger HHI below 1,000 indicate markets are not concentrated, so mergers in them are not challenged.Since the Reynolds/Lorillard as described above has a HHI change of 728 defined by (3898-3170 = 728), then thismerger is likely not going to be challenged by federal antitrust agencies.

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