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    Herfindahl Index on a hypothetical merger

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    There are 10 auto firms in this problem each showing their market share percentage (US auto industry).The proposed merger involves Ford 22% and BMW 1%. It is noted that Ford includes Mercury, Lincoln, Volvo, Jaguar and BMW includes Mini Cooper.The pre merger index involves all ten firms and equals 1,758 according to my calculations from the formula The Post Merger index invoves the now 9 firms as the result of the merger of Ford and BMW. I added 1% to 22% equaling 23% resulting from the merger and added that to the remaining percentages of each of the other 8 firms.The post merger index equaled 1,802. The guidlines say that the Justice Dept. would oppose a merger that had a pre merger index between 1,000-1,800 and resulted in a post H-index which increased by 100+ points.

    According to my calculations I wouldn't oppose this merger but I am also instructed to account for other facters concerning market structure and conduct.Other factors given where that the industry has a history of being slow to compete on the basis of price, preferring to compete through product differentiation. However the past two years firms have engaged in fierce price competition to boost sales. Also the barriers to entry are extremely high. The only new firms to arise in the U.S. in the last 50 years have been from other countries. Merger activity has been prevalent in this industry throughout its history. For your reference the firm with the highest percentage on this list is GM(29%).Besides Ford and BMW, GM, DaimlerChrysler, Toyota, Honda, Nissan all have one luxury brand car.GM has 7 other brands i.e.Buick, Pontiac, DaimlerChrysler has other brandsi.e. Dodge Plymouth. The merger of Ford and BMW yeilds 5 brands of luxury cars.I gave all this information because I am confused if any of these factors would influence my preliminary decision as to oppose or accept it. By formular alone I would have to accept the merger based on the numbers in the H-INDEX.can you help me in making the right decision?

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    Solution Preview

    I would not oppose the merger. First of all, according to the criteria from the Justice Department, since the merger does not increase the post merger index by more than 100 points, it is allowed to have that merger. ...

    Solution Summary

    The Herfindahl index is applied to a hypothetical merger.