Question

An industry consists of three firms with sales of $310,000, $640,000, and $240,000.

a. Calculate the Herfindahl-Hirschman index (HHI). Instruction: Enter your response rounded to the nearest integer.

b. Calculate the four-firm concentration ratio (C4).

c. Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, is the Department of Justice likely to attempt to block a horizontal merger between two firms with sales of $310,000 and $240,000? No Yes

Answer 1

HHI is sum of squared market shares. Here market sales are 1,190,000 in total and share of the firms is found as a percentage of their sales to total sales. This share is then squared and all squared shares are added. This gives HHI = 3978

Firm	Sales revenue	Market share	Square of market share
A	310000	26.05	678.62
B	640000	53.78	2892.45
C	240000	20.17	406.75
Sum	1190000	100.00	3978

C4 ratio is the sum of market share of top 4 firms Here only 3 firms are operating so C4 ratio is 100 percent

Yes. This will increase HHI by around 1000 points and so this merger will be blocked.

Firm	Sales revenue	Market share	Square of market share
A + C	550000	46.22	2136.15
B	640000	53.78	2892.45
C		0.00	0.00
Sum	1190000	100.00	5029