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Mergers and the Herfindahl-Hirschman Index (HHI) quiz

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  • What is a merger in the context of business firms?
    A merger is when two separate firms combine into one firm.
  • What are the two main types of mergers?
    The two main types are horizontal mergers and vertical mergers.
  • What is a horizontal merger?
    A horizontal merger is a merger between firms in the same industry.
  • Why are horizontal mergers more closely scrutinized by the government?
    Because they risk reducing competition and increasing market power.
  • What is an example of a horizontal merger mentioned in the lesson?
    AT&T and T-Mobile attempted a horizontal merger.
  • What is a vertical merger?
    A vertical merger is a merger between firms at different stages of production.
  • What real-world example of a vertical merger was discussed?
    eBay acquiring PayPal is an example of a vertical merger.
  • Why are vertical mergers less concerning to regulators than horizontal mergers?
    Because they typically do not reduce competition as much as horizontal mergers.
  • What does the Herfindahl-Hirschman Index (HHI) measure?
    The HHI measures market concentration by summing the squares of firms' market shares.
  • How do you calculate the HHI for an industry?
    Square each firm's market share (in percentage) and add them together.
  • If a firm has a 20% market share, what value do you use in the HHI calculation?
    You use 20 squared, not 0.2 squared, for the HHI calculation.
  • What does an HHI below 1500 indicate about market concentration?
    It indicates low concentration and mergers are generally allowed.
  • What HHI range indicates moderate market concentration?
    An HHI between 1500 and 2500 indicates moderate concentration.
  • What does an HHI above 2500 signify?
    It signifies high market concentration and the government is very cautious about allowing mergers.
  • Why does the government use the HHI when evaluating mergers?
    The government uses the HHI to determine if a merger would reduce competition too much in the market.