In 1986, Pepsi announced its intention to buy 7-Up, and Coca-Cola proposed buyin
ID: 2441732 • Letter: I
Question
In 1986, Pepsi announced its intention to buy 7-Up, and Coca-Cola proposed buying Dr Pepper. The table be- low shows the market shares held by the soft-drink firms in 1986. Assume that the remaining 15% of the mar- ket is composed of 15 firms, each with a market share of 1%.
Company market share (percent)
Coca-Cola 39
PepsiCo 28
Dr Pepper 7
7-Up. 6
1. Calculate the Herfindahl–Hirschman Index (HHI) for the industry as it was structured in 1986.
2. Calculate the postmerger HHI if only PepsiCo had bought 7-Up.
3. Calculate the postmerger HHI if only Coca-Cola had bought Dr Pepper.
Explanation / Answer
HHI is the sum of square of the individual market share
1. HHI is 2405
Firm name
Market Share
HHI
Coca-Cola
39
39^2 =1521
PepsiCo
28
28^2=784
Dr Pepper
7
7^2=49
7-Up.
6
6^2=36
1
1
1^2=1
2
1
1
3
1
1
4
1
1
5
1
1
6
1
1
7
1
1
8
1
1
9
1
1
10
1
1
11
1
1
12
1
1
13
1
1
14
1
1
15
1
1
2405
2. HHI is 2741
Firm name
Market Share
HHI
Coca-Cola
39
1521
PepsiCo+7-Up.
34
1156
Dr Pepper
7
49
1
1
1
2
1
1
3
1
1
4
1
1
5
1
1
6
1
1
7
1
1
8
1
1
9
1
1
10
1
1
11
1
1
12
1
1
13
1
1
14
1
1
15
1
1
2741
3. HHI is 2951
Firm name
Market Share
HHI
Coca-Cola+Dr Pepper
46
2116
PepsiCo
28
784
7-Up.
6
36
1
1
1
2
1
1
3
1
1
4
1
1
5
1
1
6
1
1
7
1
1
8
1
1
9
1
1
10
1
1
11
1
1
12
1
1
13
1
1
14
1
1
15
1
1
2951
Firm name
Market Share
HHI
Coca-Cola
39
39^2 =1521
PepsiCo
28
28^2=784
Dr Pepper
7
7^2=49
7-Up.
6
6^2=36
1
1
1^2=1
2
1
1
3
1
1
4
1
1
5
1
1
6
1
1
7
1
1
8
1
1
9
1
1
10
1
1
11
1
1
12
1
1
13
1
1
14
1
1
15
1
1
2405