In one state, 10 insurance companies have at least a five percent share of the market....

In one state, 10 insurance companies have at least a five percent share of the market. One firm controls a 25% share, two each have a 20% share, and the remaining seven firms each have a 5% share.

Calculate the HHI for insurance in this state.
What does this say about the level of competition? Provide a 2-3 sentence explanation.
Suppose the largest firm decides to split into two firms (each has a 12.5% share). Calculate the new HHI after the split. Using economic theory, identify and explain how the split may affect the cost and quality of insurance.

Expert Solution

A.

HHI = 25^2 + 20^2 + 20^2 + 7*5^2

HHI = 1600

B.

According to DoJ and FTC, any market with HHI between 1500 to 2500 is moderately concentrated. Here, the HHI value is 1600. It means that market concentration is at a moderate level. So, there is a moderately high level of competition.

C.

HHI = 2* 12.5^2 + 20^2 + 20^2 + 7*5^2

HHI = 1287.5

It will increase the competition that will cause cost to increase and quality to decrease.

Rahul Sunny answered 2 years ago

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