CFA CFA Level 1 Level 1 – N-Firm Concentration Ratio and HHI from Economics section 7.2 Simpler Measures

Level 1 – N-Firm Concentration Ratio and HHI from Economics section 7.2 Simpler Measures

  • This topic has 3 replies, 2 voices, and was last updated Aug-20 by Zee Tan.
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  • fmccray
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    Hi- I hope everyone is doing well. i have a few questions that I am not sure i fully understand. Thank you in advance to whoever can help.

    I understand calculating before the merger 80%. but, after the merger. I don’t understand why the last F-10% is not included in the answer below

    Below is the market share of firms in the FMCG industry. The market shares are before merger of A and B.

    A – 30%

    B – 20%

    C – 15%

    D – 15%

    E – 10%

    F – 10%

    What is the 4-firm concentration ratio before and after merger?

    A Before merger – 75%, after merger – 90%

    B Before merger – 80%, after merger – 90%.

    C Before merger – 85%, after merger – 95%.

    Explanation:

    B is Correct.

    N-Firm concentration ratio: It is the sum of the market shares of the largest N firms. It is almost zero for perfect competition and 100 for monopoly.

    The 4-firm concentration ratio before the merger is 30 + 20 + 15 + 15 = 80%. After the merger of A and B, the ratio will be 50 + 15 + 15 + 10 = 90%. This industry is highly concentrated. Section 7. LO.g.

    Same with this question. i got the first part of the question correct. but, not the second part.

    Below is the market share of firms in the FMCG industry. The market shares are before merger of A and B.

    A – 30%

    B – 20%

    C – 15%

    D – 15%

    E – 10%

    F – 10%

    What is the 4-firm HHI before and after merger?

    A Before merger – 0.170, after merger – 0.305.

    B Before, merger – 0.175, after merger – 0.350.

    C Before merger – 0.175, after merger – 0.305

    Your answer was Correct.

    Explanation:

    C is correct. Before merger 4-firm HHI = 0.30² + 0.20² + 0.15² + 0.15² = 0.175.

    After merger 4-firm HHI = 0.50² + 0.15² + 0.15² + 0.10² = 0.305

    Section 7.

    Zee Tan
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    Firms before merger:

    A – 30%B – 20%C – 15%D – 15%E – 10%F – 10%

    So the firms used in the 4-firm concentration ratio are A, B, C and D (4 top firms) = 30 + 20 + 15 + 15 = 80%.

    HHI also uses the same 4 top firms.

    After the merger, the firms will look like this:

    NewCo – 30% + 20% = 50%C – 15%D – 15%E – 10%F – 10%

    So the firms used in the 4-firm concentration ratio and HHI are NewCo, C, D and E (4 top firms).

    Therefore 4-firm concentration ratio after merger = 50 + 15 + 15 + 10 = 90%.

    HHI therefore = 0.50² + 0.15² + 0.15² + 0.10² = 0.305

    fmccray
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    Thank you so much Zee. I appreciate your help in answering my question. You Rock!!!

    Zee Tan
    Keymaster
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    Always a pleasure!

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