Question

In a market compromised of four firms, the first firm has a 51% market share, the second firm has a 36% market share, the third firm has a 9% market share, and the fourth firm has a 4% market share. If the third and fourth firms merge, what would be the new HHI?

Answer 1

To calculate the new HHI after the merger of the third and fourth firms, you square their respective market shares, which are now combined to 13%, and sum these squares with the squares of the other market shares. The new HHI is 4066.

Step-by-step explanation:

The question relates to calculating the new Herfindahl-Hirschman Index (HHI) in a market where two of the firms merge. HHI is used to measure the level of competition within a market, emphasizing the market share sizes of individual firms by squaring each firm's market share and summing these squares.

With the merger of the third and fourth firms in the scenario, their combined market share becomes 13%. To find the new HHI, we square the market shares of all the firms and add them together.

1. Square the market share of the first firm (51%) to get 2601 (51²).
2. Square the market share of the second firm (36%) to get 1296 (36²).
3. Square the combined market share of the third and fourth firms (13%) to get 169 (13²).
4. Add the squared market shares to calculate the new HHI: 2601 + 1296 + 169 = 4066.