Carrot Computers and its competitors purchase touch screens

Carrot Computers and its competitors purchase touch screens for their tablet computers from several suppliers. The six makers of touch screens have market shares of, respectively, 21 percent, 16 percent, 13 percent, 17 percent, 20 percent, and 13 percent. Instructions: Enter your answers as whole numbers a. What is the Herfindahl index for the touch screen manufacturing industry? b. By how much would a proposed merger between the two smallest touch screen makers increase the Herfindahl index? Would the government be likely to challenge that proposed merger? Click to select) v c. If Carrot Computers horizontally merges with its competitor Blueberry Handhelds, by how much would the Herfindahl index change for the touch screen industry?

Solution

The Herfindahl index is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers.

a) Thus, HHI = 441 + 256 + 169 + 289 + 400 + 169 = 1724.

b) The two smallest touch screen makers are the ones with market share of 13 percent and 13 percent respectively. A proposed merger between the two will increase their market share to 26%.

As a result, increase in HHI index due to their proposed merger = 441 + 256 + 289 + 400 + 676 = 2062.

Increase = 338.

Yes, the government would be likely to challeneg the proposed merger in order to avoid market concetration in the hands of a few firms.

c) Horizontal mergers are normally thought fo to be distortionary since the consumers now have a greater market share and thus a right to demand lower prices for their inputs (here touch screens). This might lead to a fall in market concentration and hence HHI.