The Justice Department has been asked to review a merger request for a market with the following four firms.
$$\begin{array} { c r }
\text { Fim } & \text { Assets } \
\text { A } & \$ 10 \text { million } \
B & 20 \text { million } \
\text { C } & 100 \text { million } \
\text { D } & 30 \text { million }
\end{array}$$
If Firm A acquires Firm D, what is the HHI for the new market?
A) 100
B) 625
C) 3,906.25
D) 4,687.50

Question

The Justice Department has been asked to review a merger request for a market with the following four firms.
$$\begin{array} { c r } 
\text { Fim } & \text { Assets } \
\text { A } & \$ 10 \text { million } \
B & 20 \text { million } \
\text { C } & 100 \text { million } \
\text { D } & 30 \text { million }
\end{array}$$
If Firm A acquires Firm D, what is the HHI for the new market?
A) 100
B) 625
C) 3,906.25
D) 4,687.50

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. Market shares are expressed as percentages. If Firm A acquires Firm D, the new firm's assets would be $10 million + $30 million = $40 million. The total market assets would be $160 million. The market shares would be: New Firm AD: 40/160 = 25%, Firm B: 20/160 = 12.5%, Firm C: 100/160 = 62.5%. Squaring these and summing gives: (25^2) + (12.5^2) + (62.5^2) = 625 + 156.25 + 3906.25 = 4687.5.

The Justice Department Has Been Asked to Review a Merger