Question

Consider an industry with 10 firms of equal size, such that each firm has 10 percent...

Consider an industry with 10 firms of equal size, such that each firm has 10 percent of total industry sales. What is the HHI index for this industry? Now suppose that three of these firms want to merge. What would be the industry HHI index if this merger were to occur? Would this proposed merger likely trigger regulatory action by the U.S. Department of Justice or the Federal Trade Commission? Explain.

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Answer #1

HHI index is the sum of squares of market shares of firms in the market.

Before Merger

HHI=10^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2=1000

After Merger

There will be one firm with 30% and 7 firms with 10% market share.

HHI=30^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2=1600

Increase in HHI after merger=1600-100=600

Since increase in HHI is more than 100, merger potentially raises significant competitive concerns. This merger is likely to attract regulatory action by US department of Justice.

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