If Bank A acquires Bank B, what is the new Herfindahl Index?

Question

Quizplus · Accepted Answer

The formula for Herfindahl Index is: sum of the squared market shares. Assuming that Bank A and Bank B each have a 50% market share before the acquisition, the initial Herfindahl Index would be 2,500 (=0.5^2 + 0.5^2 = 0.25 + 0.25 = 0.5). After the acquisition, Bank A's market share increases to 75%, while Bank B's market share decreases to 25%. Therefore, the new Herfindahl Index would be 5,050 (=0.75^2 + 0.25^2 = 0.5625 + 0.0625 = 0.625).

If Bank a Acquires Bank B, What Is the New