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Mergers and industry consolidation

An industry consists of 6 firms, with sales of $500,000, $400,000, $300,000, $150,000, 75,000, and $60,000. Now, suppose the largest and smallest firms merge.

a. Calculate the Herfindahl-Hirschman index (HHI) before the merger. Show your work.

b. Calculate the Herfindahl-Hirschman index (HHI) after the merger. Show your work.

c. Calculate the four-firm concentration ratio (C4) before the merger. Show your work and round your answer to 4 decimal places.

d. Calculate the four-firm concentration ratio (C4) after the merger. Show your work and round your answer to 4 decimal places.

e. Do you think the U.S. Department of Justice would try to block the merger? Explain.

4. Meyer Inc. operates in a highly competitive industry and competes against many other firms. In the past few years, many new firms have entered the industry and Meyer now earns a return on investment very close to the prevailing interest rate. The four-firm concentration rate and the Herfindahl-Hirschman index are both low, but the Rothschild index is well above zero. What market structure best characterizes the described industry? Explain your answer.

7. Aiden Manufacturing has a slightly unique product that sells for $30 per unit, and the marginal cost is $28. Determine the Lerner index for Aiden Manufacturing. Does this index indicate market power? Explain your answer and show your work.

8. Determine whether integration between the following types of firms would constitute a horizontal, vertical, or conglomerate merger. Explain your answers.

a. A dairy farmersâ?? cooperative buys a dairy.

b. A motorboat manufacturer merges with a marine battery producer.

c. H&R Block merges with Blockbuster.

Solution Preview

An industry consists of 6 firms, with sales of $500,000, $400,000, $300,000, $150,000, 75,000, and $60,000. Now, suppose the largest and smallest firms merge.

a. Calculate the Herfindahl-Hirschman index (HHI) before the merger. Show your work.

Total value of the industry is $1,485000
The market share of each firm is:
1: 500/1485= 0.3367
2:400/1485 = 0.2694
2: 300/1485 =0.2020
4: 150/1485=0.1010
5: 75/1485 = 0.0505
6: 60/1485= 0.0404

(34^2) + (27^2) + (20^2) + (10^2) + (5^2) + (4^2) = 2426

b. Calculate the Herfindahl-Hirschman index (HHI) after the merger. Show your work.
(38^2) + (27^2) + (20^2) + (10^2) + (5^2) = 2698

c. Calculate the four-firm concentration ratio (C4) before the merger. Show your work and round your answer to 4 decimal places.
C4 = 0.3367 + 0.2694 + .2020 + .1010 =.9091

d. Calculate the four-firm concentration ratio (C4) after the merger. Show your work and round your answer to 4 decimal places.
0.3771 + 0.2694 + .2020 + .1010 = ...

Solution Summary

Herfindahl-Hirschman index and Four firm concentration calculations before and after merger

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