Question

Suppose that the local market has four banks having the deposits shown below. Compute Herfindahl-Hirschman Index (HHI). How would the market be labeled according to the Justice Department Guidelines? Would bank A get approval for a merger with bank C?

Bank	Deposits
A	245
B	113
C	69
D	55

Answer 1

Herfindahl-Hirschman Index (HHI) is a measure of market concentration. Market concentration is a function of the number of firms and their market share in the industry. HHI ranges from least concentrated at 1 to most concentrated at 10,000.

1) Computation of HHI

Given in the question are the details of 4 banks and their corresponding deposits.

Step 1: To find HHI , we have to find the percentage of market share of each bank.

Bank	Deposit	Market Share
A	245	245/482 = 50.8%
B	113	113/482 = 23.4%
C	69	69/482 = 14.3%
D	55	55/482. = 11.4%
TOTAL	482

Step 2: Find the sum of square of market share

Bank	Market Share	Square of market share
A	50.8	50.82 = 2581
B	23.4	23.42 = 548
C	14.3	14.32 = 204
D	11.4	11.42 = 130
	Sum	2581+548+204+130= 3463

Hence the HHI = 3463

2) Market Labelling as per Justice Department Guidelines

As per the Department of Justice Guidelines:

HHI	Category
Less than 1500	Competitive market place
1500 to 2500	Moderately concentrated market place
2500 or above	Highly concentrated market place

In this scenario, since the HHI is above 2500, ie. at 3463, it can be said that the market is highly concentrated (which implies that a few players hold the major market share )

3) Would bank A get approval for merger with C

The general rule of thumb is that if a merger increases the HHI by 200 points in the industry, then there are chances it might violate the antitrust laws.

If Bank A merges with Bank C, HHI can be computed as :

Bank	Market Share	Square of market share
A	50.8+14.3= 65.1	65.12= 4238
B	23.4	23.42 = 548
D	11.4	11.42 = 130
	Sum	4238+548+130= 4916

Difference in HHI post merger = 4916-3463= 1453 which is significant rise and not ideal . It raises concern and hence Bank A would not get approval for merger with Bank C