Question

Suppose Fiat recently entered into an Agreement and Plan of Merger with Case for $4.3 billion. Prior to the merger, the market for four-wheel-drive tractors consisted of five firms. The market was highly concentrated, with a Herfindahl-Hirschman index of 3,195. Case’s share of that market was 16 percent, while Fiat comprised just 8 percent of the market. If approved, by how much would the postmerger Herfindahl-Hirschman index increase?

Answer 1

The square of aggregate shares of these two firms should be subtracted by individual square shares in order to get the rising HHI. This is so because the merger includes aggregate and eliminates the individual existence.

HHI to increase = (16 + 8)^2 – 16^2 – 8^2

                           = 24^2 – 16^2 – 8^2

                           = 576 – 256 – 64

                           = 320 – 64

                           = 256 (Answer)

Note: the overall HHI is not a considering factor here.