Question

Question 36 Assume that the industry consists of 10 firms with 10% of the market share each. If three of these firms are allowed to merge and form a new firm with a 30% market share, while the remaining seven firms will remain with 10% each,

what would the change in the Herfindahl index be due to this merger?

Answer 1

Answer 36

Herfindahl index = Sum of square of all market share.

Initially there are 10 firms and each have 10% market share

Thus, Initial Herfindahl index = 102 + 102 + 102 + 102 + 102 + 102 + 102 + 102 + 102 + 102 = 10*102

=> Initial Herfindahl index = 1000

Now, there are 7 firms with each having 10% market share and one firm having 30% market share

Thus, New Herfindahl index = 102 + 102 + 102 + 102 + 102 + 102 + 102 + 302 = 7*102 + 302

=> New Herfindahl index = 1600

So, Change in Herfindahl index = New Herfindahl index - Initial Herfindahl index = 1600 - 1000 = 600

Hence, Change in Herfindahl index due to merger = 600