Question

In: Economics

You are the manager in a market composed of 6 firms, each of which has a...

You are the manager in a market composed of 6 firms, each of which has a 16.66 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors.

Instruction: Enter your responses rounded to the nearest penny (two decimal places).

a. Calculate the premerger Herfindahl-Hirschman index (HHI) for this market.

b. Suppose that any two of these firms merge. What is the postmerger HHI?

Solutions

Expert Solution

(a)

Firm 1 = 16.66%

Firm 2 = 16.66%

Firm 3 = 16.66%

Firm 4 = 16.66%

Firm 5 = 16.66%

Firm 6 = 16.66%

Calculate the Pre-merger HHI -

HHI = [Market share of Firm 1]2 + [Market share of Firm 2]2 + [Market share of Firm 3]2 + [Market share of Firm 4]2 + [Market share of Firm 5]2 + [Market share of Firm 6]2

HHI = [16.66]2 + [16.66]2 + [16.66]2 + [16.66]2 + [16.66]2 + [16.66]2

HHI = 277.56 + 277.56 + 277.56 + 277.56 + 277.56 + 277.56

HHI = 1,665.36

Thus,

The Pre-merger HHI is 1,665.36

(b)

Now, two of these firms merge.

For example, Firm 1 and Firm 2 now merge with each other. So, their combined market share would be now 33.32%.

Calculate the postmerger HHI -

HHI = [Market share of Firm 1 + Firm 2]2 + [Market share of Firm 3]2 + [Market share of Firm 4]2 + [Market share of Firm 5]2 + [Market share of Firm 6]2

HHI = [33.32]2 + [16.66]2 + [16.66]2 + [16.66]2 + [16.66]2

HHI = 1,110.22 + 277.56 + 277.56 + 277.56 + 277.56

HHI = 2,220.46

Thus,

The post merger HHI is 2,220.46

Rahul Sunny answered 6 months ago
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