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You are the manager in a market composed of eight firms, each of which has a 12
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?
Expert Solution
N= Number of firms
w= Market share of ith firm
i= ith firm
a.)
Given,
N= 8
i= 1
w= 12.5%
Put the values in the formula;
HHI= 10000* (8* (12.5%)^2)
= 1250
b.)
There will be 7 firms in total if two firm merge and 6 with market share 12.5% each and also one firm with 25% share in market.
So,
HHI= 10000* (6* (12.5%)^2+ (25%)^2)
= 10000* (0.09375+ 0.0625)
= 1562.5
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