Suppose an industry is composed of six firms. Four firms have sales of $100,000
ID: 1216580 • Letter: S
Question
Suppose an industry is composed of six firms. Four firms have sales of $100,000 each, and two firms have sales of $50,000 each. a. Explain how concentration ratios are calculated. Determine the concentration ratios in the market. b. Explain how the Herfindahl-Hirschmann index is constructed. Determine the Hefindahl-Hirschmann index for that industry. c. Based on the FTC and DOJ Horizontal Merger guidelines, do you think that the FTC would attempt to block a horizontal merger between two firms with sales of $100,000 and $50,000? Explain. d. Explain how the FTC decides on whether to challenge a proposed merger? What other aspects does the agency consider in addition to the HHI and market concentration ratios? Use the link below to prepare your answers.
Explanation / Answer
a. Concentration ratio is the measure of percentage market share in an industry held by the largest firms within that industry.
Total sale of industry = 100,000 X 4 + 50,000 X 2 = $ 500,000
Which means Company A has 20% market share
Company B has 20% market share
Company C has 20% market share
Company D has 20% market share
Company E has 10% market share
Company F has 10% market share
(b) Herfindahl-Hirschmann index is the sum of squares of the market share of each firm in the industry.
HI = (0.20)2 + (0.20)2 + (0.20)2 + (0.20)2 + (0.10)2 + (0.10)2
HI = 0.04 + 0.04 + 0.04 + 0.04 + 0.01 + 0.01 = 0.18