There are 7 firms in an industry. Firms 1 and 2 each have a 20% share and the other 6 firms each have a 7.5% share. Firms 7 and 8 decide to merge. (i) Calculate the pre-merger and post-merger Herfindahl-Hirschman Index (HHI). (ii) Use the table below to evaluate the likelihood of an antitrust challenge. HHI Concentration Level and Possible Government Action Post-Merger HHIConcentrationChange in HHIGovernment ActionLess than 1,000Not concentratedAny amountNo actionBetween 1,000 and 1,800Moderately concentrated100 or morePossible challengeMore than 1,800 Highly concentrated50 or moreChallenge

HHI stands for Herfindahl-Hirschman Index which is evaluated through squaring the every firm market…

Answered: There are 7 firms in an industry. Firms…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

There are 7 firms in an industry. Firms 1 and 2 each have a 20% share and the other 6 firms each have a 7.5% share. Firms 7 and 8 decide to merge.

(i) Calculate the pre-merger and post-merger Herfindahl-Hirschman Index (HHI).

(ii) Use the table below to evaluate the likelihood of an antitrust challenge.

HHI Concentration Level and Possible Government Action
Post-Merger HHI	Concentration	Change in HHI	Government Action
Less than 1,000	Not concentrated	Any amount	No action
Between 1,000 and 1,800	Moderately concentrated	100 or more	Possible challenge
More than 1,800	Highly concentrated	50 or more	Challenge