Q2. The US government agencies use the HH-Index to prevent firms increasing market power. Based on their experience, the Agencies generally classify markets into three types: • Unconcentrated Markets: HHI below 1500 • Moderately Concentrated Markets: HHI between 1500 and 2500 • Highly Concentrated Markets: HHI above 2500 The Agencies employ the following general standards for the relevant markets they have defined: • Small Change in Concentration: Mergers involving an increase in the HHI of less than 100 points are unlikely to have adverse competitive effects and ordinarily require no further analysis. • Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis. • Moderately Concentrated Markets: Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny. • Highly Concentrated Markets: Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power. The purpose of these thresholds is not to provide a rigid screen to separate competitively benign mergers from anticompetitive ones, although high levels of concentration do raise concerns. Rather, they provide one way to identify some mergers unlikely to raise competitive concerns and some others for which it is particularly important to examine whether other competitive factors confirm, reinforce, or counteract the potentially harmful effects of increased concentration. The higher the post-merger HHI and the increase in the HHI, the greater are the Agencies potential competitive concerns and the greater is the likelihood that the Agencies will request additional information to conduct their analysis. An industry consists of five firms with sales of $200 000, $500 000, $400 000, $300 000, and $100 000. 1. Calculate the Herfindahl-Hirschman index (HHI). 2. Based on the FTC and DOJ Horizontal Merger Guide-lines described above, do you think the Department of Justice will try to block a merger between two firms with sales of $200 000 and $400 000? Explain. For 2 you will need to make some assumptions about the post-merger sales figures and market shares. Please state these assumptions. Market shares (pre-merger). Total industry sales are $1.500.000. FIRM Sales Market share A JUDE B C 200,000 500,000 400,000 300,000 100,000 13% 33% 27% 20%