1. An industry produces 3,840 trucks every year. The largest firm produces 870, and the next five largest firms produce 720, 390, 180, 120, and 60 trucks respectively. The remaining 100 firms each...

1. An industry produces 3,840 trucks every year. The largest firm produces 870, and the next five largest firms produce 720, 390, 180, 120, and 60 trucks respectively. The remaining 100 firms each produce 15 trucks per year.

a. Calculate the Herfindahl-Hirschman Index (HHI) for the industry.

b. Is this industry highly concentrated, moderately concentrated, or not concentrated?

c. The second- and third-largest firms now merge. Calculate the new HH I and the change in the HHI.

d. By the standards of the U.S. Justice Department, would this merger be “presumed likely to enhance market power”?

1 Answer | Add Yours

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The Herfindahl-Hirschman Index (HHI) is a method of determining how consolidated a market is.  In other words, it is a way of expressing how much of the market is controlled by a firm or a few firms.  The US government (usually the Department of Justice and the Federal Trade Commission) use the HHI to help determine whether an industry is too consolidated and antitrust proceedings are warranted.

In order to calculate the HHI for Part A, we have to determine the market share of each firm in the market.  We take each firm’s market share and square it.  We then determine the sum of all of these squares.  In the case you have given us, the first firm has 22.6% of the market, the next firm 18.75%, the third 10.1%, the fourth 4.7%, the fifth 3.1%, the sixth 1.6% and each of the other hundred has .4%.  The sum of the squares of all of these firms’ market share is approximately 1014.

So, the answer to Part A) is 1014.

By the guidelines in the link below, we can see that any HHI below 1500 is unconcentrated.  This is your answer to Part B.

For Part C, the HHI would increase by 381.  The new HHI would be approximately 1395.

For Part D, the merger would not be presumed likely to enhance market power.  It does increase the HHI, but even with the increase, the market is still unconcentrated.  

Sources:

We’ve answered 318,991 questions. We can answer yours, too.

Ask a question