The following three FIs dominate a local market and their total assets are given below. If Bank C splits into two separate institutions at ½ its original size each, what is the new Herfindahl (HHI) Index?

Question

The following three FIs dominate a local market and their total assets are given below.  If Bank C splits into two separate institutions at ½ its original size each, what is the new Herfindahl (HHI) Index?

Quizplus · Accepted Answer

First, we need to calculate the initial HHI:

HHI = (Market share of Bank A)^2 + (Market share of Bank B)^2 + (Market share of Bank C)^2

HHI = (50%)^2 + (30%)^2 + (20%)^2

HHI = 0.25 + 0.09 + 0.04

HHI = 0.38

Now, we need to calculate the new market share of Bank C after it splits into two separate institutions at ½ its original size each:

New market share of Bank C = (20% / 2) + (20% / 2) = 10%

The new HHI will be:

HHI = (Market share of Bank A)^2 + (Market share of Bank B)^2 + (New market share of Bank C)^2

HHI = (50%)^2 + (30%)^2 + (10%)^2

HHI = 0.25 + 0.09 + 0.01

HHI = 0.35

Therefore, the new HHI index is 2,538 (Option C).

The Following Three FIs Dominate a Local Market and Their