An industry has five firms, each with a market share of 20 percent. There is no foreign competition, entry into the industry is difficult, and no firm is on the verge of bankruptcy. If two of the firms in the industry seek to merge, this action would most likely be opposed by the government because the Herfindahl index for the industry is

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The Herfindahl index is calculated by summing the squares of the market shares of all firms in the industry. Initially, the index is 5*(20^2) = 2,000. After the merger, the new firm would have a 40% market share, and the index would be 3*(20^2) + 40^2 = 2,800, increasing by 800. This significant increase would likely raise antitrust concerns.

An Industry Has Five Firms, Each with a Market Share