Question

An industry consists of four firms with sales of $12,500,000, $13,700,000, $14,500,000 and $17,500,000 (all in thousands).

a. Calculate the Herfindahl-Hirschman index (HHI).

b. Calculate the four-firm concentration ratio (C4).

c. Based on the U.S. Department of Justice’s Merger Guidelines described in the text, do you think the Department of Justice would block a horizontal merger between two firms with sales of $12,500,000 and $13,700,000? Explain.

Answer 1

a) Find the market share for each firm as a percentage of total share. Then find the square of each share and add the 4 squared values. Then we get the HHI as 2540.24

Firms	Sales	Market share	Square of shares
1	12500000	21.48	461.29
2	13700000	23.54	554.11
3	14500000	24.91	620.71
4	17500000	30.07	904.13
Total	58200000	100	2540.24

b) C4 is 100 because there are only 4 firms in the market and so the sum of top 4 market shares is 100

c) In this case firm 1 and 2 merge and total share is increased to 45%. HHI is already 2540 before merger signalling a highly concentrated market and this merger raises HHI to 3551, more than 1000. This will be blocked by the DOJ because this merger makes market highly monopolistic in nature.

Firms	Sales	Market share	Square of shares
1	26200000	45.02	2026.55
2	14500000	24.91	620.71
3	17500000	30.07	904.13
Total	58200000	100	3551.39