Question

An industry consists of three firms with sales of $250,000, $825,000, and $315,000.

a. Calculate the Herfindahl-Hirschman index (HHI).

Instruction: Enter your response rounded to the nearest integer.

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b. Calculate the four-firm concentration ratio (C₄).

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c. Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, is the Department of Justice likely to attempt to block a horizontal merger between two firms with sales of $250,000 and $315,000?

• Yes

• No

Answer 1

An industry consists of three firms with sales of $250,000, $825,000, and $315,000.

a. The  Herfindahl-Hirschman index (HHI) is given by

The value of HHI lies between 0 to 10000.

b. The four-firm concentration ratio(C4) is calculated by adding the market share of the four largest market players in the market. In the present case, the four-firm concentration ratio is 100% since there are only three firms in the market.

c. Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, is the Department of Justice likely to attempt to block a horizontal merger between two firms with sales of $250,000 and $315,000?(Yes)

Explanation: When two entities with sales of $250,000 and $315,000 are merged, HHI increases to 5175 from 4360. Thus, HHI increases by 814 in a highly concentrated market. DOJ will therefore block this merger.