Assume that the industry consists of 5 firms each with 20 percent of the market share. If two of them merge, by how much does the Herfindahl index increase?
A) 800
B) 2,000
C) 2,500
D) 2,800

Question

Quizplus · Accepted Answer

The Herfindahl index is calculated by summing the squares of the market shares of all firms. Initially, the index is 5*(20^2) = 2000. After the merger, the new market shares are 40% and three firms with 20%, so the new index is 40^2 + 3*(20^2) = 3600. The increase is 3600 - 2000 = 1600.

Assume That the Industry Consists of 5 Firms Each with 20