Question

Suppose two companies attempt to merge, and they operate in an industry where the postmerger Herfindahl-Hirschman index is 2,900 and the increase in the Herfindahl-Hirschman index from the merger is 225.
Which of the following is NOT a condition that would improve the likelihood of the Justice Department approving the merger?

a. The HHIs are based on too narrow a definition of the product market.
b. There are significant diseconomies of scope.
c. One of the firms is in financial trouble.
d. There are significant economies of scale.
e. There is notable foreign competition.

Answer 1

Answer:

Option B -  There are significant diseconomies of scope is the correct answer.

Explanation:

Option  A is, not a condition that could improve the probability that the justice department would approve the merger.

The Herfindahl-Hirschman index is based on a restricted definition of the product market or the impact of foreign competition, the merger might be allowed.

It might also be permitted if one of the firms is in financial trouble, or if significant economies of scale exist in the industry.

Significant diseconomies of scope would only serve to make the merger less likely to be accepted.

Therefore, option B is the correct answer.

Answer 2

Answer: C

Explanation:

According to the United States Department of Justice a market with an HHI of 2,500 or greater is considered a highly concentrated marketplace. The general rule states that a merger which increases the HHI by more than 200 points in highly concentrated markets raise trust issues and concerns, which in this case the increase of 225 after the merger would raise concerns, this also means the Market is competitive