Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 16, Problem 2E
To determine
To ascertain: Whether the merger of Firm 2 with Firm 3 will result in precompetitive or anticompetitive, and explain.
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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.
Consider 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?
Based 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?
Chapter 16 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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- You are the manager in a market composed of eight firms, each of which has a 12.5 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 Horizontal Merger Guidelines described in this chapter, do you think the Justice Department (or FTC) would attempt to block a merger between any two of the firms? Explainarrow_forwardSuppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 23 percent, 22 percent, 18 percent, 12 percent, 11 percent, 8 percent, and 6 percent. What is the four-firm concentration ratio of the hamburger industry in this town? What is the Herfindahl index for the hamburger industry in this town? If the top three sellers combined to form a single firm, what would happen to the four-firm concentration ratio and to the Herfindahl indexarrow_forwardSuppose that a small town has six burger shops whose respective shares of the local market are (as percentages of all hamburgers sold): 26%, 20%, 18%, 14%, 12%, 10%, Assume that the largest producer now purchases the third largest firm (based market share) so that this new combined firm has the same market share as old firm 1 and old firm 3 combined. Compute the new third-firm concentration ratio and to the new HHI?arrow_forward
- Firm Market Share (%) A 18 B 17 C 17 D 17 E 16 F 15 Refer to the data. Suppose that firms in this industry split up such that there were 20 firms, each with a 5 percent market share. The four-firm concentration ratio and the Herfindahl index respectively would bearrow_forwardWhat is the, HHI, Herfindahl-Hirschman Index for an industry where six companies each have a market share of 15% and one company which has a market share of 10%?arrow_forwardAssuming Cournot-Nash market, fill in the table below when firm one has MC, = 10, firm two has MC2 = 20 and firm three has MC3 = 20. Additionally, there is no Fixed cost for none of the firms.Using data from the table below, explain the merger paradox when firms 2 and 3 merge. How the merged firm (firm 2 and 3) will be worse off?How would this outcome differ if all three firms merged?arrow_forward
- Consider two industries, each comprising ten firms. In industry A, the largest firm has a market share of 49 percent. The next three firms have market shares of 7 percent each, and the remaining six firms have equal shares of 5 percent each. In industry B, the top four firms share the bulk of the market with 19 percent apiece. The next largest firm accounts for 14 percent, and the smallest five firms equally split the remaining 10 percent of the industry. a. Compute the four-firm concentration ratio and HI for each industry. Compare these measures across the two industries. Which industry do you think truly exhibits a more competitive structure? Which measure do you think gives a better indication of this? Explain. b. Now let the three second largest firms in industry A merge their operations while holding onto their combined 21 percent market share. Recalculate the HI for industry A. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care…arrow_forwardCalculate the Herfindahl index for a duopoly market where each firm has equal market. Calculate the Herfindahl index for a three-firm oligopoly market in which one firm hasa 80% market share and the other firms each have 10% market share. iii. Calculate the Herfindahl index for a 10-firm oligopoly in which each firm has equal market shares. iv. Which of the above markets is the least competitive? Justify your position.arrow_forwardYou 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_forward
- You are the manager in a market composed of eight firms, each of which has a 12.5 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors.Instruction: Enter your responses rounded to the nearest penny (two decimal places).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 likely will not. It may, but will likely consider other factors as well. It likely will.arrow_forwardSuppose that the most popular car dealer in your area sells 10 percent of all vehicles. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl index could possibly take for car dealers in your area? In that same situation, what would the four-firm concentration ratio be?arrow_forward
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