Question

Suppose you are a manager of a firm that is part of an industry with 9 firms that have an equal market share of 10 percent. You realize that there could be a merger potential with one of the firms in the industry.

What will be the pre- and post-merger Herfindahl-Hirschman Index (HHI)?

What factors could possibly influence your decision to merge?

What are the prospects of the Justice Department and the Federal Trade Commission endorsing the idea?

Answer 1

1.

Pre Merger HHI = 10^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2 =1000
Post Merger HHI = 10^2+10^2+10^2+10^2+10^2+10^2+10^2+10^2+20^2 =1200
2.

To expand market share

Reduce cost and gain competitive advantage

3. The Justice Department and the FTC looks upon to prevent anti-competitive merger or acquisitions. Since the HHI falls between 1000 and 1800, it looks into change in Post HHI-Pre HHI = 1200-1000 = 200. As it is greater than 100, it raises significant competitive concerns depending on other factor too.