Chapter 14, Problem 1CACQ

(A)

To determine

The premerger Herfindahl - Hirschman Index for the market is to be calculated.

Explanation of Solution

Market share percentage of each eight firms is 12.5%

To calculate the HHI:

  $HHI=S_1{}^2+S_2{}^2+S_3{}^2+S_4{}^2+S_5{}^2+S_6{}^2+S_7{}^2+S_8{}^2$

  $HHI={12.5}^2+{12.5}^2+{12.5}^2+{12.5}^2+{12.5}^2+{12.5}^2+{12.5}^2+{12.5}^2$

  $HHI=156.25+156.25+156.25+156.25+156.25+156.25+156.25+156.25$

  $HHI=1250$

Therefore, the premergerHHI is 1250.

(B)

To determine

The Herfindahl- Hirschman Index post-merger is to be calculated.

Explanation of Solution

After the merger of two firms, the HHI' will be

  $HHI\text{'}=S_1{}^2+S_2{}^2+S_3{}^2+S_4{}^2+S_5{}^2+S_6{}^2+S_7{}^2$

  $HHI\text{'}={25}^2+\text{1}{2.5}^2+{12.5}^2+{12.5}^2+{12.5}^2+{12.5}^2+{12.5}^2$

  $HHI\text{'}=625+156.25+156.25+156.25+156.25+156.25+156.25$

  $HHI\text{'}=1562.5$

Therefore, after merger HHI' is 1562.5

(C)

To determine

Whether the Justice department would attempt to block the mergerbetween any two of the firms is to be explained.

Explanation of Solution

Since, the merger will give an increase of 312.5 points in HHI which is more than 100 and thus it is high.

The Justice Department will block the merger.