(A)
The premerger Herfindahl - Hirschman Index for the market is to be calculated.
(A)
Explanation of Solution
Market share percentage of each eight firms is 12.5%
To calculate the HHI:
Therefore, the premergerHHI is 1250.
(B)
The Herfindahl- Hirschman Index post-merger is to be calculated.
(B)
Explanation of Solution
After the merger of two firms, the HHI' will be
Therefore, after merger HHI' is 1562.5
(C)
Whether the Justice department would attempt to block the mergerbetween any two of the firms is to be explained.
(C)
Explanation of Solution
Since, the merger will give an increase of 312.5 points in HHI which is more than 100 and thus it is high.
The Justice Department will block the merger.
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Chapter 14 Solutions
MANAGERIAL ECON.+BUS.STRAT.(LL)>CUSTOM<
- You are the manager in a market composed of 20 firms, each of which has a 5.00 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors. a. Calculate the premerger Herfindahl-Hirschman index (HHI) for this market? b. Suppose that any two of these firms merge. What is the postmerger HHI? c. Based only on the information contained in this question and on the U.S. Department of Justice Horizontal Merger Guidelines described in this chapter, do you think the Justice Department would attempt to block a merger between any two of the firms?multiple choice It may but will also consider other factors. It likely will not. It likely will.arrow_forwardConsider a market with four firms. Suppose the first firm has a 39% market share, the second firm has a 30% market share, the third firm has a 20% market share, and the fourth firm has a 11% market share. Using the Herfindahl-Hirschman Index (HHI), what is this market's level of concentration? Now suppose the third and fourth firms propose to merge. Were they to merge, then the market's HHI would increase to? Given the increase in the HHI that would be caused by the proposed merger, would the government likely allow such a merger to occur?arrow_forwardBased only on the knowledge that the premerger market share of two firms proposing to merge was 30 percent each, an economist working for the Justice Department was able to determine that, if approved, the postmerger HHI would increase by 1,800. How was the economist able to draw this conclusion without knowledge of the other firms’ market shares? From this information, can you devise a general rule explaining how the Herfindahl-Hirschman index is affected when exactly two firms in the market merge?arrow_forward
- In the Tech industry, Tesla and Toyota are two famous brands and compete. Recently, both firms are competing to raise funds from the likes of Soft banks and Yes Bank. Tesla is in talks to raise $600 million and speed up its acquisition plans while Toyota plans to secure at least $200 million in a new funding round this year. Since both firms are going the same investors, if both approach the Soft banks then Toyota is guaranteed to raise $200 million while Tesla will receive $400 million. If both approach Yes Bank, then Toyota will definitely receive $600 million while Tesla will get $400 million. However, if Toyota approaches Yes Bank while Tesla pursues Soft bank, they are guaranteed investments worth $400 million and $800 million. On the other hand, if Toyota pursues Soft Bank while Tesla is interested in securing Yes bank’s funding, they each secure $600 million. a) Solve the Nash equilibrium for the above scenario as a simultaneous game. b) Now model the above scenario as a…arrow_forwardAssuming there are two companies selling personal computers,Company Jackfruit Computers and Company Mangoes Computer. They both have an inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. The question facing each competitor is whether or not they should widely advertise a “close out” sale on these discontinued items, or instead let excess inventory work itself off over the next few months. The net revenue to each firm in millions of $, is depicted in the payoff matrixbelow: Mangoes Jackfruit Advertise Don’t advertise Advertise M: $5 J: $5 M: $2 J: $20 Don’t advertise M: $20 J: $2 M: $10 J: $10 1. Determine the dominant strategy for each firm 2. Would collusion work in this case? Explain.arrow_forwardPrice comparison services on the Internet (as well as “shopbots”) are a popular way for retailers to advertise their products and a convenient way for consumers to simultaneously obtain price quotes from several firms selling an identical product. Suppose that you are the manager of Digital Camera, Inc., a firm that specializes in selling digital cameras to consumers that advertises with an Internet price comparison service. In the market for one particular high-end camera, you have only one rival firm—The Camera Shop—with which you’ve competed for the last four years by setting prices day after day. Being savvy entrepreneurs, the ease of using the Internet to monitor rival firms’ prices has enabled you and your rival to charge extremely high prices for this particular camera. In a recent newspaper article, you read that The Camera Shop has exhausted its venture capital and that no new investors are willing to sink money into the company. As a result, The Camera Shop will discontinue…arrow_forward
- A market is dominated by five firms, each with an equal share of market sales. What is the Herfindahl-Hirschman Index for this market?arrow_forwardThere are two competing companies: Starbucks and Coffee Bean. Both companies want to determine whether they should launch a new advertising campaign for their coffee shops. If both companies start advertising, Starbucks will attract 4 new customers, while Coffee Bean will attract 3 new customers. However, if both companies decide not to advertise, Starbucks will attract only 3 new customers and 2 new customers for Coffee Bean. If only Starbucks decides to advertise, it will attract 5 new customers, while Coffee Bean will attract only 1 new customer for not advertising. While if only Coffee Bean decides to advertise, it will attract 5 new customers, and Starbucks will only attract 2 new customers for not advertising. What is the optimal strategy for Coffee Bean if Starbucks chooses to Advertise? Please explain in detail In relation to that, if Coffee Bean chooses to Advertise, the Payoff is __. In relation to that, if Coffee Bean chooses Not to Advertise, the Payoff is __. What is…arrow_forwardForey, Inc., competes against many other firms in a highly competitive industry. Over the last decade, several firms have entered this industry and, as a consequence, Forey is earning a reLurn on investment that roughly equals the interest rate. Furthermore, the four-firm concentration ratio and the Herfindahl-Hirschman index are both quite small, but the Rothschild index is significantly greater than zero. Based on this information, which market structure best characterizes the industry in which Forey competes? Explain.arrow_forward
- An industry is composed of Firm 1, which controls 70 percent of the market, Firm 2 with 15 percent of the market, and Firm 3 with 5 percent of the market. About 20 firms of approximately equal size divide the remaining 10 percent of the market. Calculate the Herfindahl-Hirschman Index before and after the merger of Firm 2 and Firm 3 (assume that the combined market share after the merger is 20 percent). Would you view a merger of Firm 2 with Firm 3 as procompetitive or anticompetitive? Explain.arrow_forwardBurger Doodle, the incumbent firm, wishes to set a limit price of $8 (rather than the profit-maximizing price of $12) to prevent Designer Burger from entering its profitable market. The game tree above shows the payoffs for various decisions. Burger Doodle makes its pricing decision, then Designer Burger decides whether to enter or stay out of the market. If Designer Burger chooses to enter the market, then Burger Doodle may or may not decide to accommodate Designer’s entry by changing its initial price to the Nash equilibrium price of $10. If Burger Doodle canNOT make a credible commitment to maintain its initial price should Designer Burger decide to enter the market, then Burger Doodle will set price equal to $________ at decision node 1 and the outcome _____________(is, is not) a Nash equilibrium.arrow_forwardSuppose that two companies – AlphaTech and BetaLabs – are competing for market share and must simultaneously decide whether to develop a new product. Both companies are reluctant to make a decision as it is only economical for one company to develop a new product. Each company earns nothing if they decide not to develop a new product. One company can earn $50 million by developing a new product only if their competitor does not. If both companies decide to develop a new product, they each lose $10 million. Complete the payoff matrix to represent this game. Based on your solution in part (a), determine the maximin solution.arrow_forward
- Managerial Economics: Applications, Strategies an...EconomicsISBN:9781305506381Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. HarrisPublisher:Cengage Learning