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.

Solutions

Expert Solution

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

HHI = 1600

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.

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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