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Mergers and the Herfindahl-Hirschman Index (HHI) quiz #1 Flashcards

Mergers and the Herfindahl-Hirschman Index (HHI) quiz #1
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  • Which term refers to the process when one firm purchases or takes over another firm?
    This process is called a merger, where two separate firms combine into one.
  • When does a merger between companies typically occur?
    A merger typically occurs when two firms agree to combine into a single firm, either to increase market power, reduce costs, or improve efficiency.
  • Does reduced competition through merging of companies raise social welfare?
    Reduced competition from mergers usually does not raise social welfare; it can lead to higher prices and less choice for consumers, which is why governments scrutinize mergers that may reduce competition.
  • The joining of two firms in the same industry is known as a(n) _______ merger.
    The joining of two firms in the same industry is known as a horizontal merger.
  • What is a vertical merger in the context of business mergers?
    A vertical merger is when firms at different stages of production combine, such as a retailer merging with a supplier.
  • Why are governments generally less concerned about vertical mergers compared to horizontal mergers?
    Governments are less concerned about vertical mergers because they do not usually reduce competition within the same industry.
  • How do you calculate the Herfindahl-Hirschman Index (HHI) for an industry?
    To calculate HHI, square the market share percentage of each firm and sum the results, using whole numbers for percentages.
  • What does an HHI value below 1500 indicate about market concentration?
    An HHI below 1500 indicates low market concentration, suggesting that mergers are unlikely to reduce competition significantly.
  • At what HHI threshold does the government become highly cautious about allowing mergers?
    The government becomes highly cautious when the HHI is above 2500, as this indicates a highly concentrated market.
  • Why is market share important in calculating the HHI?
    Market share reflects each firm's influence in the industry, and squaring these shares in the HHI calculation emphasizes the impact of larger firms on market concentration.