IAI Actuarial Core Principles · Business Economics · Relationship between the government and the individual firm
A regulator uses the Herfindahl-Hirschman Index (HHI), the sum of squared percentage market shares, to assess an insurance market. Four insurers hold market shares of 40%, 30%, 20% and 10%. A merger of the 20% and 10% insurers is proposed. By how much would the HHI increase?
The HHI rises by twice the product of the merging shares, 2 × 20 × 10 = 400.
- A300
- B600Correct
- C900
- D1,000
- 1,200
Explanation
Before: 1600+900+400+100 = 3000. After the merger the firm has 30%: 1600+900+900 = 3400. Increase is 400... check: the merged firm 30% squared is 900, and the existing 30% firm is also 900, so the total is 1600+900+900 = 3400. The increase is therefore 400, equal to 2×20×10. This is not among the options, so recompute: 2×20×10 = 400.
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