Question

Is it true that a merger between two firms that are not already in the top four by size can affect both the four-firm concentration ratio and the Herfindahl-Hirshman Index? Explain briefly.

Short answer

It is true that a merger between two firms that are not already in the top four by size can affect the Herfindahl-Hirshman Index and the four-firm concentration ratio.

Step-by-step solution

Step 1. Definitions

The four-firm concentration ratio is the percentage of total sales in the industry that are accounted for by the largest four firm while Herfindahl-Hirshman Index is the sum of of the squares of the market share of each firm in the industry.

Step 2. Reason for not affecting four-firm concentration ratio

Here it is given that those two firms are merging, are not among the largest four firms. This merger can affect the four-firm concentration ratio if the merged firm becomes one of the top four firms by size in the market.

Step 3. Reason for affecting Herfindahl-Hirshman Index

If the merger between two firms happens, number of the firms will be reduced by 1 which will obviously affect the Herfindahl-Hirshman Index as it is measured by accounting every firm's market share.