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An industry consists of three firms with sales of $355,000, $825,000, and $435,000.
a. Calculate the Herfindahl-Hirschman index (HHI).
Instruction:
Enter your response rounded to the nearest integer.
b. Calculate the four-firm concentration ratio (C4).
c. Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, is the Department of Justice likely to attempt to block a horizontal merger between two firms with sales of $355,000 and $435,000

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Answer:

Calculating Herfindahl-Hirschman Index and Four-Firm Concentration Ratio:

a. Herfindahl-Hirschman index (HHI) = 3,814

b. The four-firm concentration ratio (C4) = 1

c. If the two firms with sales of $355,000 and $435,000 merged, the resulting HHI would increase by 1,723 to 5,537.  The post-merger HHI now exceeds that allowed under the Guidelines (2,500). The increase in HHI is more than that permitted under the Guidelines (200), the merger is likely to be blocked by the Department of Justice.

Explanation:

a) Data and Calculations:

Sales of three firms in an industry:

                            Sales          Industry Share

Firm A sales = $355,000        22% ($355,000/$1,615,000 * 100)

Firm B sales =   825,000         51% ($825,000/$1,615,000 * 100)

Firm C sales =   435,000        27% ($435,000/$1,615,000 * 100)

Total sales =  $1,615,000

Herfindahl-Hirschman index (HHI) = 3,814 (22² + 51² + 27²)

Four-firm concentration ratio (C4) = Sales of the four largest firms/Industry sales = $1,615,000/$1,615,000

If the two firms with sales of $355,000 and $435,000 were to merge, the new Herfindahl-Hirschman index (HHI) = 5,537(49² + 51²)

Increase in HHI as a result of the merger = 1,723

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