Consider a market with four firms. Suppose the first firm has a 44?% market? sha

Question

Consider a market with four firms. Suppose the first firm has a 44?% market? share, the second firm has a 35?% market? share, the third firm has a 15?% market? share, and the fourth firm has a 6?% market share. Using the? Herfindahl-Hirschman Index? (HHI), what is this? market's level of? concentration??? nothing. ?(Enter a numeric response using an? integer.)? ? Now suppose the third and fourth firms propose to merge. Were they to? merge, then the? market's HHI would increase to nothing. Given the increase in the HHI that would be caused by the proposed? merger, would the government likely allow such a merger to? occur???

Explanation / Answer

Market share of Firm 1 = 44%

Market share of Firm 2 = 35%

Market share of Firm 3 = 15%

Market share of Firm 4 = 6%

Calculate HHI -

HHI = (Market share of Firm 1)2 + (Market share of Firm 2)2 + (Market share of Firm 3)2 + (Market share of Firm 4)2

HHI = (44)2 + (35)2 + (15)2 + (6)2

HHI = 1,936 + 1,225 + 225 + 36 = 3,422

The market's level of concentration is 3,422.

Now, suppose the third and fourth firms propose merger.

Combined market share for firm 3 and firm 4 would be 21%.

Calculate HHI after merger -

HHI after merger = (Market share of Firm 1)2 + (Market share of Firm 2)2 + (Combined Market share of Firm 3 and 4)2

HHI = (44)2 + (35)2 + (21)2

HHI = 1,936 + 1,225 + 441 = 3,602

After merger, the market's HHI would increase to 3,602

The value of HHI of the market before merger is greater than 2,500 which means that the market is highly concentrated.

In such scenario, if, after merger, HHI increases between 100 and 200 points then in such case government does not likely to allow such merger as such merger is considered as enhancing the market power and reducing competition.

So,

The government would not likely to allow such a merger to occur.

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