ACCA Strategic Professional · Advanced Financial Management · Regulatory framework and processes
Two competing retailers plan to merge. The competition authority measures market concentration using the Herfindahl-Hirschman Index (HHI), the sum of squared market shares (in percentage points). Before the merger the market has five firms with shares of 30%, 25%, 20%, 15% and 10%. The two merging firms hold 20% and 10%. What is the increase in HHI caused by the merger?
The HHI rises by 400. The merging firms' separate contributions are 20² + 10² = 500, while the combined 30% share contributes 900. The increase equals twice the product of their shares, 2 × 20 × 10 = 400.
- A400
- B600Correct
- C300
- D1,500
Explanation
Pre-merger contribution of the two firms: 20² + 10² = 400 + 100 = 500. Post-merger the combined firm has 30%, giving 900. Increase = 900 − 500 = 400. Check using the formula 2 × 20 × 10 = 400. Wait: this gives 400, so the correct option is 400.
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