Question

Answer the following questions based on the table below showing major smart phone market producers and their respective market shares.

Firms	Market Share (%)	HHI < 2,100	HHI after LG & HTC Merger	HHI after Huawei & Nokia Merger
Samsung	30
Apple	24
Huawei	16
LG	15
Yota	5
HTC	4
Motorola	3
Nokia	2
Others	1
Total:	100

1. What is the value of HHI Index of this market? Support the answer with calculations.
   
   
   
2. If LG wants to merge with HTC, then will US Justice Department block this merger if its guidelines state that HHI Index must be equal to 2100 for this industry to be competitive? Support the answer with calculations.
   
   
   
3. Will US Justice Department challenge the merger of Huawei and Nokia under the same guidelines? Support the answer with calculations.
   
   
   
4. Would Apple initiate a price reduction for its phones if it is 95% sure that the rivals will do the same, which could result in a potential $75,000 loss or in potential profit of $1.2 million if the price cut is not matched? Support the answer with calculations.
   

Answer 1

Question 1)

HHI = s1^2 + s2^2 + s3^2 + ... + sn^2 (where s is the market share of each firm expressed as a whole number, not a decimal)

HHI =30^2+24^2+16^2+15^2 +5^2 +4^2 +3^2 +2^2 +1^2=2012

Question 2)

If LG merge with HTC then combined share of LG and HTC=19%

So New HHI=30^2+24^2+16^2+19^2 +5^2 +3^2 +2^2 +1^2=2132

Since New HHI is greater than Defined HHI(2100) for competitive industry.Hence US Justice department can challenge this

merger.

Question 3)

If Huawei and NOKIA merges then combined share of LG and HTC=18%

So New HHI=30^2+24^2+15^2 +18^2+5^2 +4^2 +3^2 +1^2=2076

Since New HHI is lower than Defined HHI(2100) for competitive industry.Hence US Justice department cannot challenge this

merger.

Question 4)

Probability of price reduction by competitor p=95%

Loss for apple by price reduction L=$75000

if price reduction is not matched then profit W=$1.2 millions=$1200000

So expected profit for apple E(W)=p*L+(1-p)W=0.95(-75000)+0.05*(1200000)=-$11250

Since expected profit from price reduction is negative so apple should initiate a price reduction.