Question

Suppose Fiat recently entered into an Agreement and Plan of Merger with Case for $4.3 billion. Prior to the merger, the market for four-wheel-drive tractors consisted of five firms. The market was highly concentrated, with a Herfindahl-Hirschman index of 2,650. Case’s share of that market was 18 percent, while Fiat comprised just 9 percent of the market.

A. If approved, by how much would the postmerger Herfindahl-Hirschman index increase?

Answer 1

Post Merger Increase in HHI

= (Combined share)^2 -Fiat share^2 - Case share ^2

= (18+9)^2 - 18^2 -9^2

= 324 is the net increase

New HHI after merger

= Old HHI + Net Increase

= 2650+324

= 2974 is the answer to this question