ECONOMICS

Economics

Assignment No.1

Herfindahl-Hirschman Index - HHI

A commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000. The HHI is expressed as:

Formula

HHI = s1^2 + s2^2 + s3^2 + ... + sn^2 (where sn is the market share of the ith firm).

The closer a market is to being a monopoly, the higher the market's concentration (and the lower its competition). If, for example, there were only one firm in an industry, that firm would have 100% market share, and the HHI would equal 10,000 (100^2), indicating a monopoly. Or, if there were thousands of firms competing, each would have nearly 0% market share, and the HHI would be close to zero, indicating nearly perfect competition.

Sol 1: as we know that HHI = s1^2 + s2^2 + s3^2 + ... + sn^2.

HHI(before Merger)=

27.57^2+23.48^2+12.2^2+7.07^2+1.97^2+2.18^2+1.88^2+1.34^2+1.22^2+0.98^2+0.84^2+0.72^2+18.26^2 = 1861.304

HHI(After Merger)=

27.65^2+23.55^2+14.42^2+7.09^2+1.97^2+1.89^2+1.35^2+1.23^2+0.99^2+0.84^2+0.72^2+18.31^2 =1925.578

As HHI value is not closed to 10,000 in both cases we can say that market is not being a monopoly, the lower market's concentration and the higher is in competition. But we can compare the results by looking at the results that HHI has slightly increased after merger in comparison with before merger. It can be predicted that market share will more increase so as to show result in increase of HHI.

Sol 2: Firstly have a look at share of supply test then to discuss the decision of the Competition Commission.

Merger qualifying for investigation

A merger situation qualifies for investigation under the Fair Trading Act if it meets four criteria :

two or more enterprises (that is, business activities of any kind) must cease to be distinct or there must be arrangements in progress or in contemplation which will lead to enterprises ceasing to be distinct ;

at least one of the enterprises must be carried on in the UK by or under the control of a body corporate incorporated in the UK (which means that a merger between two companies not resident in the UK may still qualify for investigation if either of them controls any enterprise which is carried on in the UK or by a UK company) ;

the merger must either not yet have taken place or have taken place not more than four months before the reference is made, unless it took place without public announcement and without the Secretary of State or the Director General being told about it (in which case the four-month period starts from the announcement or the time the Secretary of State or the Director General is told) ; and

either

the gross value of the world-wide assets being acquired must be more than £70 million (the assets test) ; or

the enterprises which cease to be distinct must supply or acquire goods or services of a similar kind and must as a result of the merger together supply or acquire at least one quarter of those goods or services supplied in ...