One reason that companies participate in mergers and acquisitions is to:

• A. avoid economies of scale
• B. reduce the number of products offered in the market
• C. increase market concentration, which can be measured by a higher Herfindahl-Hirschman Index (HHI)
• D. decrease their overall market share

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of market concentration. Market concentration refers to the extent to which a small number of firms dominate total sales, production, or capacity in a market.
2. Step 2: Learn about the Herfindahl-Hirschman Index (HHI), which is a common measure of market concentration. It is calculated by summing the squares of the market shares of all firms in the market: \(HHI = \sum (s_i)^2\), where \(s_i\) is the market share of firm \(i\) expressed as a percentage.
3. Step 3: Recognize that mergers and acquisitions often lead to an increase in market concentration because they combine the market shares of the merging firms, resulting in fewer competitors and larger individual market shares.
4. Step 4: Understand that avoiding economies of scale is not a typical reason for mergers; rather, firms often seek to exploit economies of scale through mergers to reduce costs.
5. Step 5: Conclude that the correct reason companies participate in mergers and acquisitions is to increase market concentration, which is reflected by a higher HHI, rather than reducing the number of products or decreasing market share.