An industry composed of two identical firms and one twice as large as each of the two others is likely to have a Herfindahl-Hirschman Index of ________.

Question

Quizplus · Accepted Answer

The HHI is calculated as the sum of the squares of the market shares of all firms in the industry. Let's assume that each of the two identical firms has a market share of 1/4 (25%) and the larger firm has a market share of 1/2 (50%). Then the HHI can be calculated as follows:

(1/4)^2 + (1/4)^2 + (1/2)^2 = 1/16 + 1/16 + 1/4 = 3/8

Multiplying this by 10,000, we get an HHI of 3,750, which is closest to option B.

An Industry Composed of Two Identical Firms and One Twice