Question

here are seven firms in the automobile industry. The market shares of the firms are 34​ percent, 21​ percent, 17​ percent, 9​ percent, 8​ percent, 6 percent and 5 percent. Assume that the two​ (2) smallest companies​ (in terms of market​ share) in the automobile industry seek to merge in an effort to realize economies of scale and effectively compete with the larger companies in the industry. If​ so, then most likely

Answer 1

The answer is "Option 4".

Step-by-step explanation:

The Herfindahl-Hirschman Index formula:

`HHI=s_(12) + s_(22) + s_(32) + s_(42) +........ + s_(n2)`

here sn is the firm n's share of the market proportion represented the society in general number instead of a decimal

Index Herfindahl-Hirschman:

`= (34)^2 + (21)^2 + (17)^2 + 92 + 82 + 62 + 52\\\\= 1156 + 441 + 289 + 81 + 64 + 36 + 25\\\\= 2092`

Index Herfindahl-Hirschman(Result of the merger, firms with profit margins of 6% and 5% provided market shares of respectively).

`= (34)^2 + (21)^2 + (17)^2 + 92 + 82 + 112\\\\= 1156 + 441 + 289 + 81 + 64 + 36 + 121\\\\= 2188`

The market with just an HHI of less than 1,500 is called a competitive industry, one on an HHI of 1,500 to 2,500 is called a moderately competitive store, and one on an HHI of 2,500 or higher is considered a highly potent store by us Justice department.

All businesses operate in a moderately crowded market, as well as a merger such as this reduces competition (increases chances of monopoly). Also as result, the Justice Dept may examine its merger but will most likely deny this because the Herfindahl-Hirschman index has risen.