Question

1. Assume two firms in a relevant antitrust market each have 20% market share, three other firms each have 15% market share, one firm has 10% market share, and one firm has 5% market share.
   1. Compute the pre-merger HHI.
   2. If the two largest firms propose to merge and offer to divest a plant equal to 10% market share to the smallest market share firm in the market, what is the post-merger, post-divestiture HHI and change in HHI?
   3. Would you expect the Federal Trade Commission (FTC) to accept the proposed merger and divestiture? Why or why not?

Answer 1

We are given the following market share information before the merger

Firm	Market share	Square of market share
1	20%	20 x 20 = 400
2	20%	20 x 20 = 400
3	15%	15 x 15 = 225
4	15%	15 x 15 = 225
5	15%	15 x 15 = 225
6	10%	10 x 10 = 100
7	5%	5 x 5 = 25
	HHI	400+400+225+225+225+100+25 = 1600

Post merger the HHI is calculated below:

Firm	Market share	Square of market share
1 & 2	30%	30 x 30 = 900
3	15%	15 x 15 = 225
4	15%	15 x 15 = 225
5	15%	15 x 15 = 225
6	10%	10 x 10 = 100
7	15%	15 x 15 = 225
	HHI	900+225+225+225+100+225 = 1900

If HHI is less than 1500, then the industry is not considered concentrated. Between 1500 to 2500, it is moderately concentrated, from 2500 to 10000 the concentration is considered high

In the above case, the industry is moderately concentrated and the increase in HHI is of 300 points. In Moderately concentrated industry a change of more than 100 points draws FTC scrutiny but as it is not going beyond the moderately concentrated range, the FTC will accept this merger