Question

A merger between firms in a market that is already highly concentrated is ________?

1) likely to increase competition
2) likely to decrease competition
3) likely to have no impact on competition
4) cannot be determined

Answer 1

A merger in a highly concentrated market is likely to decrease competition, as it can result in increased market concentration measured by the four-firm concentration ratio and HHI.

Step-by-step explanation:

A merger between firms in a market that is already highly concentrated is likely to decrease competition. This is because a merger, particularly among leading firms, reduces the number of competitors in a market. The four-firm concentration ratio and the Herfindahl-Hirshman Index (HHI) are metrics used to assess the impact of mergers on market competition.


If two smaller firms merge and the result is that the new firm is now one of the top four in the market, the four-firm concentration ratio will change, indicating an increase in market concentration. An increase in concentration generally signifies a decrease in competition, as fewer firms hold a larger market share.