Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 11

Based only on the knowledge that the premerger market share of two firms proposing to merge was 30 percent each, an economist working for the Justice Department was able to determine that, if approved, the postmerger HHI would increase by 1,800. How was the economist able to draw this conclusion without knowledge of the other firms' market shares? From this information, can you devise a general rule explaining how the Herfindahl-Hirschman index is affected when exactly two firms in the market merge? ( Hint: Compare a 2 + b 2 with [ a + b ] 2.)