MANAGERIAL/ECON+BUS/STR CONNECT ACCESS
MANAGERIAL/ECON+BUS/STR CONNECT ACCESS
9th Edition
ISBN: 2810022149537
Author: Baye
Publisher: MCG
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Chapter 7, Problem 7CACQ
To determine

The general rule for impact on HHI when two firms in market merge.

Expert Solution & Answer
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Explanation of Solution

Sales of firms are termed in industry as: S1,S2,,S3........Sn respectively such total sales in the industry is Sr

When firms are not merged, then HHI is calculated as:

  10,000i=1n(SiST)2=10,000[(S1ST)2+(S2ST)2+...+(SiST)2+(Si+1ST)2+...+(SnST)2]

When there is merger between two firms: HHI is calculated as follows:

  10,000[(S1ST)2+(S2ST)2+...+(Si+Si+1ST)2+...+(SnST)2]

Difference between above two:

  10,000[(Si+Si+1Sr)2(SiST)2(Si+1ST)2]

  =10,000[2Si+Si+1ST2]

Since,

  SiST=Si+1ST=0.3

Comparison of HHI when firms are merged and not merged:

  10,000[2SiSi+1ST2]

  =10,000×2×0.3×0.3

  =1800

Value of HHI increases by 1800.

For the purpose of generalization, if the two firms merge, the increase in HHI post-merger is given by:

  10,000[(Si+Si+1ST)2(SiST)2(Si+1ST)2]

  =10,000[2SiSi+1ST2]

  =2×10,000×SiST×Si+1ST

Where, SiST and Si+1ST are the pre-merger market share of the two merging firms.

Economics Concept Introduction

Introduction:HHI is a measure to know concentration of market power in an industry. Higher the value of HHI, higher is the firm’s market power.

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