If Bank 1 is acquired by Bank 3, what is the impact on the market's HHI? $$\begin{array} { | c | r | }
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
A)An increase in the HHI of 1600.
B)An increase in the HHI of 624.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.

Question

If Bank 1 is acquired by Bank 3, what is the impact on the market's HHI? $$\begin{array} { | c | r | } 
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
A)An increase in the HHI of 1600.
B)An increase in the HHI of 624.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.

Quizplus · Accepted Answer

The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. Before the acquisition, the HHI is calculated as follows: $(\frac{100}{800})^2 + (\frac{200}{800})^2 + (\frac{500}{800})^2 = 0.015625 + 0.0625 + 0.390625 = 0.46875$. Multiplying by 10,000 (to avoid dealing with decimals), the HHI is 4687.5. After the acquisition, Bank 1 and Bank 3's assets combine to \$600 million, so the new HHI is $(\frac{600}{800})^2 + (\frac{200}{800})^2 = 0.5625 + 0.0625 = 0.625$. Multiplying by 10,000, the new HHI is 6250. The increase in HHI is 6250 - 4687.5 = 1562.5, which rounds to 1563, indicating a more concentrated market.

If Bank 1 Is Acquired by Bank 3, What Is