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Calculating HHI index in the given cases

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Suppose the market for toy trains is comprised of the following seven competitors with the indicated market shares:
Little Toot Toys 55% Trains R Us 3%
I Think I Can 25% Thomas Trains 3%
Engines, Inc. 8% The Fastest Trains 2%
Silver Streak 4%

a. What is the Herfindahl Index (HHI) for this industry?
b. If there were a merger between Engines, Inc. and Silver Streak, what is the new industry Herfindahl Index?
c. Would the Justice Department allow such a merger?
d. Why or why not?
e. If there were a merger between I Think I Can and Engines, Inc., what is the new industry Herfindahl Index?
f. Would the Justice Department allow such a merger?
g. Why or why not?
h. If there were a merger between Silver Streak, Trains R Us, Thomas Trains and The Fastest Trains, what is the new industry Herfindahl Index?
i. Would the Justice Department allow such a merger?
j. Why or why not?

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Solution Summary

Solution describes the steps to calculate HHI. It also studies if proposed mergers would be allowed by Justice Department.

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a. What is the Herfindahl Index (HHI) for this industry?
HHI Index=55^2+25^2+8^2+4^2+3^2+3^2+2^2=3752

b. If there were a merger between Engines, Inc. and Silver Streak, what is the new industry Herfindahl Index?

Little Toot Toys 55% Trains R Us 3%
I Think I Can 25% Thomas Trains 3%
Engines, Inc+Silver Streak=12% The Fastest Trains 2%

HHI Index=55^2+25^2+12^2+3^2+3^2+2^2=3816

c. ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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