The following table shows the market shares during the first three months of 2017 for companies...

The following table shows the market shares during the first three months of 2017 for companies in the US personal computer (PC) market:

Company	Market Share
Lenovo	20%
Hewlett-Packard	20%
Dell	15%
ASUS	7%
Apple	7%
ACER	6%
Others	25%

Treating “Others” as a single firm, how would the “Agencies” characterize the concentration level in this market? How does your answer change if “Others” consists of 5 firms each with 5% market share? Explain/Show Work. USE HHI

Treating “Others” as a single firm, predict whether the agencies would challenge a merger between Dell and Apple. How does your answer change (if at all) if you treat “Others” as 5 firms each with 5% market share? Explain/Show Work.USE HHI

This time, suppose Lenovo and Hewlett-Packard were to merge. Treating “Others” as a single firm, would this merger likely be blocked? If so, is it presumptively illegal? Does your answer change if you treat “Others” as 5 firms each with 5% market share? Explain/Show Work. USE HHI

Solutions

Expert Solution

The Herfindahl Hirschman Index (HHI) is a common measure of level of concentration in the market sector. This shows if the market is leaning towards few powerful players or many equal players. Mathematically, it is calculated by summing up the squares of market share percentages. To much concentration of power may lead to monopolies and loss in consumer welfare.

The Justice Department in US, uses HHI to scrutinise mergers. It segments markets broadly into 3 types:

(i) 0 - 1500: Low concentration

(ii) 1500 - 2500: Moderate Concentration

(iii) 2500 - 10,000: High Concentration

In general, if mergers increase HHI by 100 - 200, they are scrutinised. Or if they increase such that market goes into High concentration mark, they are again scrutinised. Mergers in low concentration markets are not scrutinised, even if their HHI rises by more than 100 upon merger. Thus, there are no strict rules regarding scrutiny, however, these are rough indicators.

On this backdrop, we address the question as follows.

(a) No mergers:

Company	Market Share	HHI (square of market share)
Lenovo	20%	400
Hewlett-Packard	20%	400
Dell	15%	225
ASUS	7%	49
Apple	7%	49
ACER	6%	36
Others	25%	625

Thus, when "Others" is a single firm, then the HHI score is 1784. The Agencies will regard this as "Moderate Concentration".

Company	Market Share	HHI (square of market share)
Lenovo	20%	400
Hewlett-Packard	20%	400
Dell	15%	225
ASUS	7%	49
Apple	7%	49
ACER	6%	36
Others	5%+5%+5%+5%+5%	125

Thus, when "Others" is separated into 5 firm, then the HHI score is 1284. The Agencies will regard this as "Low Concentration".

(b) Dell and Apple merger:

Company	Market Share	HHI (square of market share)
Lenovo	20%	400
Hewlett-Packard	20%	400
Dell + Apple	15%+7% =	484
ASUS	7%	49
Apple	-	-
ACER	6%	36
Others	25%	625

Thus, when "Others" is a single firm, and Dell and Apple merge, then the HHI score is 1944. The Agencies will regard this as "Moderate Concentration". The HHI has changed by 210 points. Under a moderately concentrated economy, this will attract greater scrutiny by Agencies into the merger.

Company	Market Share	HHI (square of market share)
Lenovo	20%	400
Hewlett-Packard	20%	400
Dell + Apple	22%	484
ASUS	7%	49
Apple	-	-
ACER	6%	36
Others	5%+5%+5%+5%+5%	125

When "Others" are separate units, the market is Low Concentration, and a merger between Apple and Dell will not be scrutinised by the Agencies, despite the HHI rising by 210 to 1494.

Company	Market Share	HHI (square of market share)
Lenovo + Hewlett Packard	20+20=40%	1600
Hewlett-Packard	-	-
Dell	15%	225
ASUS	7%	49
Apple	7%	49
ACER	6%	36
Others	25%	625

Thus, when "Others" is a single firm, and Dell and Apple merge, then the HHI score is 2584. The Agencies will regard this as "High Concentration". The HHI has changed by 800 points. This is in itself a bbig increase in market concentration, and it makes the sector of high concentration. The Agencies will not allow this to happen.

Company	Market Share	HHI (square of market share)
Lenovo + Hewlett Packard	20+20=40%	1600
Hewlett-Packard	-	-
Dell	15%	225
ASUS	7%	49
Apple	7%	49
ACER	6%	36
Others	5%+5%+5%+5%+5%	125

Even when Others are separate entities, the HHI after merger becomes 2084, which is a moderate concentration with an increase of 800 points. The Agencies will scrutinise this merger.

Thanks!

Rahul Sunny answered 3 weeks ago

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