The following three FIs dominate a local market and their total assets are given below. $$\begin{array} { | c | r | }
\hline \text { Institution } & \text { Asset Size } \
\hline \text { Bank A } & \text { \$50 million } \
\hline \text { Bank B } & \text { \$60 million } \
\hline \text { Bank C } & \text { \$90 million } \
\hline
\end{array}$$ If Bank A acquires Bank B, what is the new Herfindahl-Hirschman Index (HHI)?
A)60.
B)100.
C)5,800.
D)5,050.
E)6,525.

Question

The following three FIs dominate a local market and their total assets are given below. $$\begin{array} { | c | r | } 
\hline \text { Institution } & \text { Asset Size } \
\hline \text { Bank A } & \text { \$50 million } \
\hline \text { Bank B } & \text { \$60 million } \
\hline \text { Bank C } & \text { \$90 million } \
\hline
\end{array}$$ If Bank A acquires Bank B, what is the new Herfindahl-Hirschman Index (HHI)?
A)60.
B)100.
C)5,800.
D)5,050.
E)6,525.

Quizplus · Accepted Answer

The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. After Bank A acquires Bank B, their combined assets are $50 million + $60 million = $110 million. The total market assets become $110 million (A+B) + $90 million (C) = $200 million. The market shares are then 55% for A+B and 45% for C. Squaring these (converting to decimals first) gives 0.55^2 + 0.45^2 = 0.3025 + 0.2025 = 0.505. To get the HHI, we multiply by 10,000, resulting in 5,050.

The Following Three FIs Dominate a Local Market and Their