Question

The widget industry is comprised of six firms of varying sizes. Firm 1 has 35 percent of the market. Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the Herfindahl-Hirschman index for the widget industry? Based on the U.S. Department of Justice merger guidelines described in the text, do you think the Justice Department would be likely to block a merger between firms 5 and 6? Explain using calculations.

Answer 1

The Herfindahl-Hirschman index for the widget industry is 2250.

Yes.The Justice department will block the merger between firm 5 and 6 as it increases the concentration in the industry.

Explanation:

The HHI index is calculated by summing up the square of the m,market share of all the firms in the industry.

From the information given:

Firm 1 has 35 percent of the market, Firm 2 has 25 percent, and the remaining firms have 10 percent each.

Therefore:

HHI=(35²+25²+10²+10²+10²+10²)=(1225+625+100+100+100+100)=2250

If firm 5 and 5 6 were to combine,the new HHI would be:

HHI=(35²+25²+10²+10²+20²)=(1225+625+100+100+400)=2450

An increase in HHi means the market will be more concentrated(fewer firms will have more market power which has negative impacts on the competitiveness of the industry).The Justice department will therefore block the merger between firm 5 and 6.