Question

In 1986, Pepsi announced its intention to buy 7-Up and Coca-Cola proposed buying Dr. Pepper. The year-end market shares in 1985 held by the largest firms in the industry were as follows: Coca Cola 38%; PepsiCo 29%; 7-Up 6%; Dr. Pepper 5%; RJ Reynolds (Canada Dry & Sunkist) 3%; Royal Crown Cola 3%; P&G(Orange Crush & Hires Root Beer) 2%. The remaining firms share the last 14% of the market. Assume they each have a market share of 1%.

* Calculate the HHI for the industry as structured at the end of 1985

* Calculate the post-merger HHI if only PepsiCo had bought 7-Up

* Calculate the post-merger HHI if only Coca Cola had bought Dr. Pepper

* How would you expect the Justice Department to respond to each merger considered separately? Together? (Refer to Notes on Concentration Ratios)