Question

(a) suppose fiat recently entered into an agreement and plan of merger with case for $4.3 billion. prior to the merger, the market for four-wheel-drive tractors consisted of five firms. the market was highly concentrated, with a herfindahl-hirschman index of 2,765. case's share of that market was 22 percent, while fiat comprised just 12 percent of the market. if approved, by how much would the postmerger herfindahl-hirschman index increase?

Answer 1

The herfindahl-hirschman index is calculated by summing the square of each company's market share.

In this case, the two firms separately would account for 628 of the herfindahl-hirschman index (12*12+22*22)

If the firms merge, they would account for 1,156 of the herfindahl-hirschman index (34*34)

This is an increase of 528 meaning the market is more concentrated.