A particular industry was initially segmented evenly among 20 firms (Phase 1). F

Question

A particular industry was initially segmented evenly among 20 firms (Phase 1). Five years later, the industry was still evenly segmented among competing firms, but there were now only 10 firms (Phase 2). Eventually 6 firms emerged with equal market share of the industry, but a move toward deregulation has prompted two of the firms to merge. In a preemptive move (fearing the FTC) the merged firms agree to sell off portions of the market to the other four firms so that the market will be equally divided among all five firms.

How does this affect the HHI, and is the merger viable under these circumstances?

Explanation / Answer

HHI before merger and after sell off = sum of (market share of each firm * 100)^2

= ( .2 * 100) ^2 + ( .2 * 100) ^2 + ( .2 * 100) ^2 + ( .2 * 100) ^2 +( .1 * 100) ^2 +( .1 * 100) ^2

=1800

HHI after merger = ( .2 * 100) ^2 + ( .2 * 100) ^2 + ( .2 * 100) ^2 + ( .2 * 100) ^2 + ( .2 * 100) ^2 = 2000

since HHI is already 1800 which represents a highly concentrated industry and any increase by 50 or more warrants anti trust challenge, such a merger is unlikely to be accepted

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