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Mergers and industry consolidation

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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.

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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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See Also This Related BrainMass Solution

Mega mergers and oligopoly

The following is an assignment that I am having trouble finding information about. I have Googled and searched both the internet and my textbook. I don't know where else to look. Any help with where to look would be much appreciated. (I understand the concept of mergers and oligopoly just not the details.) Thanks

Mega-mergers and Oligopoly
The U.S. automobile industry has had " the Big Three" for some time. Despite the competition from the Asia and Europe, General Motors, Ford and Chrysler had a combined market share of over 70 percent in 1998. But now more and more industries have their own version of the Big Three automakers, thanks to a decade of megamergers. The tobacco industry has the Big Three: Philip Morris, RJR Nabisco, and Brown & Williamson. So does the beverages industry: Coca-Cola, Pepsi, and Cadbury Schweppes. The telephone industry has the Big Four: AT&T/TCI, Bell Atlantic/GTE (Verizon), SBC/Ameritech and MCI WorldCom. The music industry has the Big Five: Universal/PolyGram, Warner Music, Sony Music, EMI Group and BMG Entertainment. With several significant mergers in recent years, the trend seems to be continuing. In 1998 alone, for example, Citicorp and Travelers Group (Citi) merged to form the No. 1 financial services company in the world, and Exxon and Mobil Corp. merged to create the world's largest oil producer.
When an industry is dominated by a few large firms, it is characterized as an oligopoly. In an oligopolistic market, the product may be differentiated, barriers to entry are significant, and long-run profits are possible. A distinguishing characteristic of this market structure is the interdependence of firms within industry. Because there are only a few dominant firms, the actions of one firm affects those of the others, vice versa. In an oligopolistic market, firms have the temptation to collude and establish a cartel in an attempt to keep prices high and increase profits by acting as a joint monopoly. A prominent example of a cartel is the Organization of Petroleum Exporting Countries (OPEC) which is currently conducting meetings with the aim of shoring up world oil prices.
The recent trend of megamergers has not been limited to domestic firms. The latest frenzy of megadeals has created several "global oligopolies." For example, British Petroleum acquired Amoco Corp in 1998 and Daimler-Benz of Germany acquired Chrysler Corp. to form DaimlerChrysler. Several new deals are in the works as well. For example, Vodafone Group, the biggest U.K. mobile phone firm, may acquire AirTouch (now Verizon Wireless) to create the world's largest wireless carrier. With the advent of modern technology in communications and transportation, this trend of global oligopoly may continue into the new millennium.
SOURCES:
Lindgren, April, and Theresa Tedesco. "Mega-Merger Mania: the Long-Term Implications", The Vancouver Sun, May 14, 1998.
Mehta, Stephanie N. "In Phones, the New Number is Four", The Wall Street Journal, March 8, 1999.
Pascal, Zachary G. "Let's Play Oligopoly! Why Giants Like Having Other Giants Around", The Wall Street Journal, March 8, 1999.
Peline, Jeff. "AT&T to Buy TCI for $48 Billion", CNET News.com, June 24, 1998.
"Year of the Megamerger: Exxon-Mobil Deal Caps a Year of Huge Corporate Combinations", CNN Financial Network (CNN Money), December 1, 1998.
Answer the following questions in a 2-3 page essay:
1. From the firms' point of view, what are some of the incentives for them to consolidate?
2. Is a high degree of market concentration a boon or threat to consumers? Explain.
3. How can the oligopoly market structure benefit both consumers and businesses by forging common standards in industries that experience rapid technological change?

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