If the four firms in an industry represented 40%, 30%, 20%, and 10% of the market, respectively, what would be the Herfindahl-Hirschman Index for this industry? What if the largest firm then divested into two equal sized companies?

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Quizplus · Accepted Answer

The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market share of each firm and then summing the results. Initially, the HHI is 40^2 + 30^2 + 20^2 + 10^2 = 1600 + 900 + 400 + 100 = 3000. If the largest firm divests into two equal firms, each with 20% market share, the new shares are 30%, 20%, 20%, 20%, and 10%, leading to an HHI of 30^2 + 20^2 + 20^2 + 20^2 + 10^2 = 900 + 400 + 400 + 400 + 100 = 2300.

If the Four Firms in an Industry Represented 40%, 30