Assume that the industry consists of 2 firms each with 50 percent of the market share. If each of them is split into 2 smaller companies, by how much does the Herfindahl index decrease?
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 in the industry. Initially, with two firms each having 50% market share, the Herfindahl index is $2 \times (50^2) = 2 \times 2500 = 5000$. After splitting each firm into two, there are now four firms, each with 25% market share. The new Herfindahl index is $4 \times (25^2) = 4 \times 625 = 2500$. The decrease in the Herfindahl index is $5000 - 2500 = 2500$.

Assume That the Industry Consists of 2 Firms Each with 50