Calculation of Change in the HHI Associated with a Merger The Justice Department has been asked to review a merger request for a market with the following four firms.
If Firm C acquires Firm D,what is the HHI for the new market?

Question

Quizplus · Accepted Answer

The HHI can be calculated using the formula: HHI = sum of squared market shares of all firms in the market.

Before the merger:
- Firm A market share = 20%
- Firm B market share = 30%
- Firm C market share = 15%
- Firm D market share = 35%

HHI = (0.2^2 + 0.3^2 + 0.15^2 + 0.35^2) x 10,000 = 5,500

After the merger (assuming all of Firm D's market share goes to Firm C):
- Firm A market share = 20%
- Firm B market share = 30%
- Firm C market share = 50%
- Firm D market share = 0%

HHI = (0.2^2 + 0.3^2 + 0.5^2 + 0^2) x 10,000 = 6,796.875

Therefore, the answer is C, and the HHI increases from 5,500 to 6,796.875, indicating a moderate level of market concentration.