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The HHI is calculated by summing the squares of the individual market shares of all the participants. The spectrum of market concentration as measured by the HHI can be broadly characterized as unconcentrated (HHI below 1000), moderately concentrated (HHI between 1000 and 1800), and highly concentrated (HHI above 1800). The resulting regions provide a useful framework for merger analysis,.

Given, Firm 1 - 70% of market share
Firm 2 - 15% of market share
Firm 3 - 5% of market share

HHI before merger = 702 + 152 + 52 = 5150

Since the HHI is above the 1800, the market is highly concentrated.
As the combined market share, after the merger of firm 2 & 3 is 20%, then

HHI after merger = 702 + 202 = 5300
The difference in the HHI = 5300-5150 = 150.

According to the merger guidelines, if the Post-Merger HHI is above 1800, markets in this region are highly concentrated. A merger is presumed "likely to create or enhance market power or facilitate its exercise" if it produces an increase in the HHI of more than 100 points in a highly concentrated market. i.e if the merger increases the HHI by less than 200 in a highly concentrated market, it is not considered anti-competitive and is generally approved . While, mergers in which the HHI increases by more than 200 points in a highly concentrated market ...

Solution Summary

The HHI is determined. Pricing and analysis/organizational architecture and institutional economics issues are addressed.