Question

Consider a market with 6 firms, two of which have 25% market share each and four have 12.5% market share each.   

a. What is the category of market concentration for this market based on the Dept. of Justice HHI guidelines? Show the necessary calculations. (2)

b. If the two firms with 25% market share each merge to form one firm with 50% market share (and the other four firms maintain their 12.5% market share each), how will concentration in the doodad market, as measured by HHI, change? Would this merger cause the DOJ question the merger and review it carefully? Show the necessary calculations (4)

Answer 1

a) HHI = 25² + 25² + 12.5² + 12.5² + 12.5² + 12.5²

           = 625 + 625 + 156.25 + 156.25 + 156.25 + 156.25

          = 1,875

According to the Department of Justice,

• An HHI of less than 1,500 represents an industry with low market concentration,
• An HHI ranging between 1,500 and 2,500 represents moderate concentration, and
• An HHI of more than 2,500 represents a highly concentrated industry.

Therefore, since here the HHI is 1,875, it means that the market represents moderate concentration.

b) After merger;

HHI = 50² + 12.5² + 12.5² + 12.5² + 12.5²

           = 2,500 + 156.25 + 156.25 + 156.25 + 156.25

          = 3,125

Now the market is highly concentrated, because the post merger HHI is more than 2,500.

The mergers that increase the HHI by more than 200 points will likely be challenged bu DOJ.