Question

Assume that there are 8 equally sized hospitals in a market area.

What is the Herfindahl-Hirschman index? If two of these hospitals decide to merge, what will be the new Herfindahl-Hirschman index?

(A) Calculate the four-firm concentration ratio (CR4).

(B) Calculate the Herfindahl-Hirschman Index (HHI).

(C) What is the structure of the type of market structure (e.g., oligopoly, monopolistic competition)?

Hint: You need to show your calculations and how you get to the final solutions. Partial credits are available for the steps!

Answer 1

If there are 8 equally sized hospitals in a market area, each hospital's market share = 100% / 8 = 12.5%.

A) Four firm concentration ratio = 12.5% * 4 = 50%

B) The HHI = 12.5^2 * 8 = 1,250

If two of these hospitals decide to merge, 6 hospital will have market share of 12.5% and 7th hospital will have market share of 25%.

The new HHI = [12.5^2 * 6] + 25^2 = 937.5 + 625 = 1,562.5

C) As we know, if the HH index < 1800 it is a monopolistically competitive market. So, since the HHI is less than 1800, the market structure is monopolistic competition.