Question

For this analysis, you will want to refer to the section in chapter 7 of the Baye/Prince text on the computation of the Herfindahl-Hirschman Index and the section on firm “conduct” dealing with “integration and merger activity,” particularly “horizontal integration.” You’ll also find a bit more commentary on mergers and antitrust legislation near the beginning of chapter 14, “A Manager’s Guide to Government in the Marketplace.”

Industry data is from the IBISWorld data base, accessible to JBU students through the JBU Library’s online resources. According to IBISWorld: “Pharmaceutical manufacturers develop prescription and over-the-counter products that are used to prevent or treat illnesses in humans or animals. Brand name drugs and medication have patent protection. This industry does not include nutritional supplement or cosmetic product manufacturers.”

Let’s do a little industry analysis; the numbers here a generally reflective of market conditions in recent years, with minor adjustments, but this exercise should still be considered “hypothetical.” Suppose annual industry sales are $188.4 billion. In this industry there are six leading companies, several smaller significant competitors, and a number of even smaller niche firms. The top companies and their revenue data are:

Company	Revenue
Pfizer Inc.	$ 22.2 billion
AbbVie Inc.	$ 21.5 billion
Johnson & Johnson	$ 21.5 billion
Merck & Co. Inc.	$ 19.4 billion
Amgen Inc.	$ 18.3 billion
Bristol-Myers Squibb	$ 13.0 billion
Eli Lilly & Co.	$ 9.2 billion
Sanofi SA	$ 9.2 billion
GlaxoSmithKline PLC	$ 6.4 billion
Other smaller firms combined	$ 47.7 billion
Industry Total	$188.4 billion

1. Calculate an accurate estimate of the Herfindahl-Hirschman Index for this industry. (You should be able to establish an “upper bound” even though you don’t know the individual market shares of the smallest firms; however, be careful – none of the “other smaller firms” are as large as GlaxoSmithKline in sales, so you shouldn’t lump them together in your calculation!)

HHI =

Answer 1

HHI is calculated as the sum of the market shares of the individual firms
For other smaller firms, the maximum sales is less than 6.4 billion, therefore minimum number of small firms>47.7/6.4, so minimum number of small firms = 8

Maximum HHI = s1^2 + s2^2 +...... + n*sn^2

Company	Revenue	Individual Share	Squared	HHI
Pfizer Inc.	22.2	11.78%	1.39%	1.39%
AbbVie Inc.	21.5	11.41%	1.30%	1.30%
Johnson & Johnson	21.5	11.41%	1.30%	1.30%
Merck & Co. Inc.	19.4	10.30%	1.06%	1.06%
Amgen Inc.	18.3	9.71%	0.94%	0.94%
Bristol-Myers Squibb	13	6.90%	0.48%	0.48%
Eli Lilly & Co.	9.2	4.88%	0.24%	0.24%
Sanofi SA	9.2	4.88%	0.24%	0.24%
GlaxoSmithKline PLC	6.4	3.40%	0.12%	0.12%
Other smaller firms combined	47.7	3.16%	0.10%	0.80%
Industry Total	188.4			7.87%
HHI	786.6674