NISM Certifications · NISM-Series-XV: Research Analyst · Industry Analysis
The Herfindahl-Hirschman Index (HHI) is computed as the sum of squared market shares (in percent). An industry has four firms with market shares of 40%, 30%, 20% and 10%. If the two smallest firms merge, by how much does the HHI change?
The HHI increases by 400. Before the merger it is 1600+900+400+100 = 3000; after combining the 20% and 10% firms into one 30% firm it is 1600+900+900 = 3400. The rise equals twice the product of the merging shares, 2×20×10.
- AIncreases by 200Correct
- BIncreases by 400
- CIncreases by 600
- DIncreases by 100
Explanation
Before: 1600+900+400+100 = 3000. After merger the 20% and 10% firms form 30%: 1600+900+900 = 3400. The change is 400. Check: the increase equals 2×20×10 = 400. Hence the option showing 200 is wrong (it omits the factor of 2 only partially) and 400 is correct.
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