Question

Suppose that three firms make up the entire tire manufacturing industry. One has a 50% market share, and the other two have a 25% market share each. The Herfindahl index of this industry is . A new firm, Tread Tough, enters the tire manufacturing industry and immediately captures a 15% share of the market. This would cause the Herfindahl index for the industry to . The largest possible value of the Herfindahl index is 10,000 because: An industry with an index higher than 10,000 is automatically regulated by the Justice Department An index of 10,000 corresponds to 100 firms with a 1% market share each An index of 10,000 corresponds to a monopoly firm with 100% market share

Answer 1

Answer: 2700

Step-by-step explanation:

Given data

The Herfindahl Index of the industry is

HI = 50^2 + 25^2 + 25^2 = 3,750.

when another firms joins the market, this would cause a decrease in the Herfindahl Index.

new firm ( tread tough) enters the market with a 15% of the share market this would affect the largest shareholder there by causing a reduction in his shares to 35%.

the total HI would now be

HI = 35^2 + 25^2 + 25^2 + 15^2 = 2700.

The Herfindahl Index can never be more than 10,000, as this would represent a 100% market monopoly from a single company. In a perfect monopoly HI is 100^2 = 10,000.