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Mergers and the Herfindahl-Hirschman Index (HHI)



Mergers and the HHI

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Alright, so, now let's dive a little deeper into the topic of mergers, mergers are when two separate firms combined into one firm, Right? They're merging into one firm. So let's see some of the implications of that. So, business mergers, right, result from firms merging into one. So, there's two types of mergers, we're gonna have horizontal mergers and this is mergers between firms in the same industry, firms in the same industry. So there's a good example, this actually happened a few years ago where A T and T and T Mobile were trying to merge and they had to lobby to the government to say that this wasn't going to reduce competition, right, that they were actually merging because they were gonna be able to supply a better product to the consumers, this and that. Well, in the end, the government didn't buy it and didn't allow the merger. Right. So they thought that that merger would have reduced competition too much and given them too much market power. Okay, the other type of merger is a vertical merger. So, this is a merger between firms at different stages of production, right? So different stages of production. So, an example of real world example of this was when Ebay bought Paypal. Right? So Ebay bought Paypal when it started, Ebay would have the auction on their website and then when the auction completed, they'd go to the, to the Paypal website to complete the transaction. Well, Ebay just cut out the middleman and bought out Paypal. So that they didn't have to pay Paypal for whatever fees they had to pay them before. Right? So, what we're going to see is that the government is more concerned with these mergers than vertical mergers, right? With the horizontal merger, um, that's where we're going to see situations where competition is at risk, right? There, there's a situation where the firms are going to combine and there's gonna be less competition in the market in the market, Right? So, we're going to discuss this, her fondle, Hirshman index. Alright, So this is how the government uh, decides whether a merger is going to be, uh, too much for the, too much for the market, right? To too much reduction in competition, or if it should allow the merger. Okay, So, we're gonna use what's called the H. H. I. Which is an index here to gauge concentration in an industry. So concentration. Is that concentration of market power? Right? Concentration of market power. Okay, So, how much can they influence the price? Right? Based on that? So to calculate the H. H. I. What we're gonna do is we're gonna take the market share of each firm and square it, and then we're gonna add them all together. Okay, So the market share of firm A squared the market share from b squared market share from C. Right? So what is market share? Well, it's the share of the total market that the firm has, Right? So, if we think of the whole revenue for the whole industry, right? All the revenue that comes in from selling this product, well, how much of that total revenue belongs to your firm. So you can imagine in a monopoly, the firm's revenue is equal to the total revenue right there, the only firm in the industry, so they're gonna have 100% market share, right? So when we do our H. H. I. We want to have a percentage, so something like 20% and then we're gonna use this number 20 we're not gonna treat it as like 200.2, we're not gonna do it as decimals, we're gonna use the the absolute number of the percent. So if someone had 20% market share, we would calculate the H H. I. We would use 20 square, not 200.2 squared. Okay, so let's go ahead and first let's define what our H. H. I. Standards are gonna be like, what what it means once we get our H. H. I. S. And then we'll do some examples of different, different H. H. I. S. In different industries. Okay, so the first is an H. H. I. Below 1500. So if the H H. I comes out below 1500 we're going to say that it's not concentrated. Okay, that's a low H. H. I. Mergers at that point would be allowed because there's not that much concentration in the industry. They don't think that that would reduce competition. Okay, Next is like the medium right between 1525 100 they're gonna say it's moderately concentrated. Okay, so now the government might take a little more uh caution when allowing mergers, Right? And then there's ahh, eyes above 2500. So, if the market is highly concentrated, right, this is when the H. H. I. Is above 2500. Now, the government is gonna be really cautious about allowing mergers to happen. Okay, so let's see some examples of some H. H. I. S. Actually, let's pause right here, and let's do the examples in the next video. Cool. Let's start that now.

Calculate HHI in the following industries: 

One firm with 100% market share 

Two firms with 50% market share 

Four firms with market shares of 30%, 30%, 20%, and 20% 

Ten firms with 10% market share

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The HHI for this industry is: