Question

An industry consists of three firms with sales of $310,000, $725,000, and $405,000.

a. Calculate the Herfindahl-Hirschman index (HHI). Instruction: Enter your response rounded to the nearest integer. 3789 3789 Correct
b. Calculate the four-firm concentration ratio (C4). 100 100 Incorrect
c. Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, is the Department of Justice likely to attempt to block a horizontal merger between two firms with sales of $310,000 and $405,000?

Answer 1

A. 3,789

B. 100%

C.5,000

Step-by-step explanation:

(a) Total market ($'000) = 310 + 725 + 405 = 1,440

Firm 1 share = 310 / 1,440 x 100 = 21.53%

Firm 2 share = 725 / 1,440 x 100 = 50.35%

Firm 3 share = 405 / 1,440 x 100 = 28.12%

HHI = (21.53)2 + (50.35)2 + (28.12)2 = 3,789

(b) Since there are only 3 firms in market, therefore the four-firms concentration ratio will be 100% b

(c) Total revenue share of the two firms = (310 + 405) / 1440 x 100 = 49.65%

Post-merger HHI = (49.65)2 + (50.35)2 = 5,000

Yes. If the guideline considers any post-merger HHI above 1800 as highly concentrated market, this merger will be probably attempt to block a horizontal merger between two firms with sales.