If Bank 1 is acquired by Bank 2,what is the impact on the market's HHI? $\begin{array}{lccc}
\text {Bank }& \text { Asset Size}\
1&\$ 100 \text { million}\
2& \$ 200 \text { million}\
3&\$ 500 \text { million}\
\end{array}$

A)An increase in the HHI of 1600.
B)An increase in the HHI of 625.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.

Question

If Bank 1 is acquired by Bank 2,what is the impact on the market's HHI? $\begin{array}{lccc}
  \text {Bank }&  \text { Asset Size}\
 1&\$ 100    \text { million}\
2& \$ 200   \text { million}\
3&\$ 500  \text {  million}\
\end{array}$

A)An increase in the HHI of 1600.
B)An increase in the HHI of 625.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.

Quizplus · Accepted Answer

The market's HHI (Herfindahl-Hirschman Index) is calculated by adding up the squares of the market shares of all the firms in the market.

Before the acquisition, the HHI is:
$$(0.1)^2+(0.2)^2+(0.5)^2=0.26$$

If Bank 1 is acquired by Bank 2, then Bank 2's asset size will increase to $300$ million, and the new market shares will be:
$$\frac{300}{100+300+500}=\frac{3}{10}$$
$$\frac{500}{100+300+500}=\frac{1}{2}$$

The new HHI will be:
$$(0.3)^2+(0.5)^2=0.34$$

The change in HHI will be:
$$0.34-0.26=0.08$$

Thus, the answer is B, an increase in the HHI of 625.

If Bank 1 Is Acquired by Bank 2,what Is the Impact