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 initial Herfindahl index is 2,000 (5 firms each with 20% market share: 5*(20^2) = 2,000). If two firms merge, the new market shares would be 40% and 20% for the remaining three firms. The new Herfindahl index would be 2,800 (40^2 + 3*(20^2) = 2,800), an increase of 800, which is significant and likely to be opposed by the government.

An Industry Has Five Firms, Each with a Market Share