21-146 If Bank 1 is acquired by Bank 2,what is the impact on the market's HHI?

Question

Quizplus · Accepted Answer

To calculate the impact on HHI, we first need to find the market shares of Bank 1 and Bank 2. Bank 1 currently has a market share of 20%, while Bank 2 has a market share of 25%. The combined market share after the acquisition would be 45%.

Using the formula HHI = (s1)^2 + (s2)^2 + … + (sn)^2, where s1, s2, … sn are the market shares expressed as percentages, we can calculate the pre-acquisition HHI as follows:

HHI = (20)^2 + (25)^2 + (15)^2 + (10)^2 + (5)^2 + (5)^2 + (5)^2 + (5)^2 = 1925

After the acquisition, the HHI would be:

HHI = (45)^2 + (15)^2 + (10)^2 + (5)^2 + (5)^2 + (5)^2 + (5)^2 = 2550

Therefore, the increase in HHI would be 2550 - 1925 = 625, which is option B.

21-146 If Bank 1 Is Acquired by Bank 2,what Is