Question

1. Given the market shares below, calculate the Herfindah-Hirschman Index (HHI).  Would the Federal Trade Commission approve a merger between GM and Ford?  Explain.

Company	Market Share (in Percent)
GM	21
Ford	19
Toyota	16
Chrysler	13
Nissan	9
Hyundai	7
Kia	6
Subaru	5
Volkswagen	4

Answer 1

The table is prepared below. HHI uses the squared sum of all the market shares measured in percentages. For this part, the before merger HHI turns out to be 1434. The after merger share of GM-Ford is 21 + 19 = 40 percent and so the new HHI is 2232

Note that HHI is increased by 798 which shows that the merger will be blocked by the FTC. This is because increase in HHI by more than 200 points in highly concentrated markets where HHI is now 2232 (between 1500 and 2500) will raise market power under the Horizontal Merger Guidelines.

Company	Market Share (in Percent)	Squared values before merger	Squared values after merger
GM	21	441
Ford	19	361	1600
Toyota	16	256	256
Chrysler	13	169	169
Nissan	9	81	81
Hyundai	7	49	49
Kia	6	36	36
Subaru	5	25	25
Volkswagen	4	16	16
SUM		1434	2232