An industry has a single firm and is found to have violated antitrust laws. The government breaks it up into two firms that will share the market equally. The Herfindahl index for this industry would change from
A) 100 to 50.
B) 10,000 to 2,500.
C) 100,000 to 50,000.
D) 10,000 to 5,000.

Question

Quizplus · Accepted Answer

The Herfindahl index measures the concentration of market power among the existing firms in a market. It is calculated as the sum of the squared market shares of all firms in the market.

In this case, the industry had a single firm, so its market share was 100%. Therefore, the initial Herfindahl index was 10,000 (100 squared).

After the breakup, there are two firms that will share the market equally. Assuming that each firm gets a 50% market share, the Herfindahl index would be calculated as follows:

(50)^2 + (50)^2 = 2,500

Therefore, the Herfindahl index would change from 10,000 to 5,000, which is a reduction by half. However, this calculation assumes that the new firms will have equal market power, which may not be the case in reality.

An Industry Has a Single Firm and Is Found to Have