Nationwide Bank has approached Hometown Bank with a proposal to merge. The follo
ID: 1254890 • Letter: N
Question
Nationwide Bank has approached Hometown Bank with a proposal to merge. The following table lists the sales of the banks in the area. Use this informatiojn to calculate the four firm consentration ration and the Herfindahl Hirschman index. Based on the U/S/ Department of Justice merger guidelines described in the text, do you think the Justice Department is likely to block the proposed merger?______________________________________…
Bank name/Sales (In millions)
Mega Bank/$900
City Bank/850
Nationwide Bank/735
Atlantic Savings/555
Bulk Bank/345
Metropolitan Bank/340
American Bank/265
Hometown Bank/120
Urban Bank/90
Explanation / Answer
The total sales in the area is 4200 The market shares for the 4 largest firms are Mega Bank: 900/4200 = 0.2143 = 21.43% City Bank: 850/4200 = 0.2024 = 20.24% Nationwide Savings Bank: 735/4200 = 0.1750 = 17.50% Atlantic Savings: 555/4200 = 0.1321 = 13.21% The Four firm concentration ration is the sum of these market shares: 21.43 + 20.24 + 17.50 + 13.21 = 72.38% The Herfindahl Index is computed as the sum of the squares of the market shares of all firms in an industry (as a decimal although it can also be computed from percentages). The calculation for the market shares of the remaining firms proceeds as above. .2134^2 + .2024^2 + .1750^2 + .1321^2 + .0821^2 + .0810^2 + .0631^2 + .0286^2 + 0.0214^2 = 0.1531 (or equivalently 1531 using percentages) Using the 4 firm concentration ratio, this industry would be classified as an oligopoly for the area, and the Herfindahl index suggests that it is moderately concentrated. The Justice Dept. guidelines indicate that a merger that increases the Herfindahl index by more than 100 points is likely to raise anti-trust concerns. So recalculate the Herfindahl combining the market shares of Nationwide and Hometown Bank. .1750 + .0286 = .2036 (merged market share .2134^2 + .2036^2 + .2024^2 + .1321^2 + .0821^2 + .0810^2 + .0631^2 + 0.0214^2 = .1630 (or 1630 using percentages). This is an increase of greater than 100 points and is likely to be blocked by the Justice Department. You can also see that the 4 firm concentration ration has increased to 75.15%
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