If a firm with a 10 percent market share merges with a firm with 15 percent of the market, by how much will the Herfindahl index change? The other firms have 40 percent, 15 percent, 10 percent, and 10 percent shares.
A)It rises by 100.
B)It rises by 300.
C)It falls by 200.
D)It falls by 250.
E)It rises by 25.

Question

Quizplus · Accepted Answer

To calculate the change in Herfindahl index, we first need to calculate the pre-merger index.

Pre-merger index:
10^2 + 15^2 + 40^2 + 15^2 + 10^2 + 10^2 = 3330

After the merger, the combined market share will be 25 percent. So, the post-merger index can be calculated as:

10^2 + 40^2 + 25^2 + 10^2 + 10^2 = 2100

The change in Herfindahl index is the difference between pre-merger and post-merger index:

3330 - 2100 = 1230

Therefore, the Herfindahl index rises by 300.

If a Firm with a 10 Percent Market Share Merges