2. In one state, 9 insurance companies have at least a five percent share of the...

2. In one state, 9 insurance companies have at least a five percent share of the market. One firm controls a 30% share, two each have a 20% share, and the remaining six firms each have a 5% share. (show work)

a) Calculate the HHI for insurance in this state.

b) What does this say about the level of competition? Provide a 2-3 sentence explanation.

c) Suppose the largest firm decides to split into two firms (each has a 15% 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

2.

A.

HHI = 30^2 + 2*20^2 + 6*5^2

HHI = 1850

B.

The value of HHI is 1850 that in between the 1500 to 2500. It means that insurance market is moderately concentrated. So, competition is of moderate level.

C.

New HHI = 2*15^2 + 2*20^2 + 6*5^2

New HHI = 1400

Since HHI has come down below the level of 1500, then market has become very competitive. It will makes firms to be price takers in some capacity. It will decrease the cost and increase the quality.

Rahul Sunny answered 2 years ago

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