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Herfindahl-Hirschman index

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Based only on the knowledge that the premerger market share of two firms proposing to merge was 20 percent each, an economist working for the justice department was able to determine that, if approved, the post merge HHI would increase by 800. How was the economist able to draw this conclusion without knowledge of the other firms' market shares? From this information can you devise a general rule explaining how the Herfindahl-Hirschman index is affected when exactly two firms in the market merge?

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The HHI is the sum of the squares of each company's market share. So if a company has a 20 percent market share, we would add 400 to the HHI and so forth. When two companies merge, the HHI increases because the square of a sum is more then the separate squares of each number.

We can see how the economist could ...

Solution Summary

The expert examines Herfindahl-Hirschman index.