Question

An industry has 10 firms, each with a market share of 10 percent. There is no foreign competition, entry into the industry is difficult, and no firm is on the verge of bankruptcy. a. If 5 of the firms in the industry seek to merge, the Herfindahl index would change from 2,200 to 2,200. 600 to 1,000. 600 to 1,600. 1,000 to 2,200. b. This merger would be challenged, because of the value of the new Herfindahl index only. not be challenged. be challenged, because of the substantial change in the Herfindahl index only. be challenged, because of the value of the new Herfindahl index and the substantial change in the index

Answer 1

The Herfindahl Index of 0% is known to be perfect competition while 10000 is known to pure monopoly.

HHI < 1500, Competitive market

2500 > HHI > 1500, Moderately concentrated market

HHI > 2500, Highly concentrated market

Herfindahl index is calculated by summation of square of all the firms in the market.

Thus initially the Herfindahl Index is 10 ^ 2 + 10 ^ 2 + 10 ^ 2 + 10 ^ 2 + 10 ^ 2 +10 ^ 2 + 10 ^ 2 + 10 ^ 2 + 10 ^ 2 + 10 ^ 2 = 1000

Thus initially it was competitive market.

a) As five firms merged into 1 and rest five are operating individually. After the merger the Herfindahl Index is

50 ^2 + 10 ^ 2 + 10 ^ 2 + 10 ^ 2 + 10 ^ 2 + 10 ^ 2 = 3000

Thus now the market is highly concentrated on one side means there is monopoly in the market.

b) As the values have changed by large and there is now monopoly in the market as per the values. Thus it will be challenged. So option D is correct.