You are the manager in a market composed of 4 firms each of

You are the manager in a market composed of 4 firms, each of which has a 25.00 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors.

Instruction: Round your answers to the nearest penny (two decimal places).

1. Calculate the premerger Herfindahl-Hirschman index (HHI) for this market.

2. Suppose that any two of these firms merge. What is the postmerger HHI?

3. 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?

(select one below)

a) It may but will also consider other factors.

b) It likely will.

c) It likely will not.

Solution

HHI is a measure of market concentration.It is calculated by summing the squares of shares of all the firms.

1.)HHI=25²+25²+25²+25²=2500 ;It is premerger HHI for 4 firms each having 25% share.

2.)If any of two firms merge.Now there will be 3 firms

Then one firm which is a merged firm will have 50% share.and other two will have 25% share each.

HHI=50²+25²+25²=3750; it is a post merger HHI for 3 firms.

3.)According to horizontal merger guidelines,if post merger HHI is above 2500,agencies will regard the market as highly concentrated.So a merger will likely to enhance market power.So justice department should attempt to block the merger between two firms.