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Calculating HHI in an Unconcentrated Market

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You are the manager in a market composed of 12 firms, each of which has a 8.33 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors.

Instruction: Round to the nearest penny (two decimal places).

Calculate the premerger Herfindahl-Hirschman index (HHI) for this market.

b. Suppose that any two of these firms merge. What is the postmerger HHI?

c. Based only on the information contained in this question and on the U.S. Department of Justice Horizontal Merger Guidelines described in this chapter, do you think the Justice Department would attempt to block a merger between any two of the firms?

a. It likely will not.
b. It may but will also consider other factors.
c. It likely will.

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Solution Preview

a. HHI = 12 * 8.33^2 = 832.66

b. If two firms merge, you will have 10 firms with a 8.33 market share and 1 firm with a 16.66 market share
HHI = 10* 8.33^2 + 16.66^2 = 971.44

c.
According to the DOJ-FTC 2010 ...

Solution Summary

The solution answers the question on how to calculate the HHI and evaluates a situation where the market is "unconcentrated". Clear formulas and step by step guidance is provided as well.

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Questions

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2. Suppose a merger of firms would simultaneously lessen competition and reduce unit costs through economies of scale. Do you think such a merger should be allowed?

3. In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to acquire the Seven-Up Company. Shortly thereafter the Coca-Cola Company, with 39 percent of the market, indicated it wanted to acquire the Dr. Pepper Company. Seven-Up and Dr. Pepper each controlled about 7 percent of the market. In your judgement, was the government's decision to block these mergers appropriate?

4. Use economic analysis to explain why the optimal amount of product safety may be less than the amount that would totally eliminate risks of accidents and deaths. Use automobiles as an example.

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