Which of the following is true of acquisitions in the context of the Herfindahl-Hirschman Index (HHI)?

• A. Acquisitions have no effect on the HHI, regardless of the market shares involved.
• B. Acquisitions are only relevant to the HHI if they involve firms from different industries.
• C. Acquisitions always decrease the HHI, leading to more competitive markets.
• D. Acquisitions typically increase the HHI, indicating a higher level of market concentration.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the Herfindahl-Hirschman Index (HHI) as a measure of market concentration, calculated by summing the squares of the market shares of all firms in the market: \(HHI = \sum_{i=1}^N (S_i)^2\), where \(S_i\) is the market share of firm \(i\) expressed as a percentage.
2. Step 2: Recognize that when an acquisition occurs, one firm takes over another, combining their market shares into a single entity, which changes the distribution of market shares in the industry.
3. Step 3: Analyze how the combined market share of the acquiring firm and the acquired firm affects the HHI by replacing their individual squared shares with the square of their combined share, which generally increases the sum of squares due to the mathematical property that \((a+b)^2 > a^2 + b^2\) for positive \(a\) and \(b\).
4. Step 4: Conclude that acquisitions typically increase the HHI because the market becomes more concentrated under fewer firms with larger shares, reflecting less competition.
5. Step 5: Note that acquisitions involving firms from the same industry directly impact the HHI, while acquisitions across unrelated industries do not affect the HHI of a specific market.