Suppose an industry is composed of 10 firms. Each firm's share of total sales in the industry is 10 percent. If two of the firms merge, then the four-firm concentration ratio in the industry is

Question

Quizplus · Accepted Answer

Before the merger, each of the 10 firms had a 10% share of the total sales, giving us a Herfindahl-Hirschman Index (HHI) of 100.

After the merger, we have 9 firms with a 10% share each and 1 firm with a 20% share, giving us a new HHI of:

HHI = (0.1)^2 x 8 + (0.2)^2 + (0.1)^2 x 1 = 0.02 + 0.04 + 0.01 = 0.07

Therefore, the four-firm concentration ratio is:

CR4 = (0.1 x 4)/1 = 40%

So the answer is (C) 50%.

Suppose an Industry Is Composed of 10 Firms