Question

1. There is an industry with 5 firms. There is one large firm with 80% market share, three medium-sized firms with 6% market share, and one small firm with 2% market share. Calculate the Herfindahl-Hirschman Index (HHI) for this industry. Please show your work.
   
2. Is this industry either highly concentrated, moderately concentrated, or not concentrated?
   
3. There is an industry with 5 firms. There is one large firm with 80% market share, three medium-sized firms with 6% market share, and one small firm with 2% market share. Say the large firm merged with one of the medium-sized firms. By how much would this increase the industry's HHI? Please show your work.
   
4. According to the guidelines, should the FTC either approve the merger, investigate the merger further, or challenge the merger?

Answer 1

A]

Herfindahl-Hirschman Index (HHI) for an industry = sum of market shares of each firm in the industry

HHI = 802 + 62 + 62 + 62 + 22

HHI = 6512

B]

An industry with an HHI of less than 1,500 is considered a competitive marketplace, an HHI of 1,500 - 2,500 a moderately concentrated marketplace, and an HHI of above 2,500 a highly concentrated marketplace.

This industry is highly concentrated.

C]

Market shares after merger are as follows :

• large firm = 80% + 6% = 86%
• 2 medium sized firms = 6% each
• small firm = 2%

HHI = 862 + 62 + 62 + 22

HHI = 7472

Increase in HHI = 7472 - 6512

Increase in HHI = 960

D]

FTC should challenge the merger as the industry is highly concentrated and the lack of competition is suggestive of a monopoly