An industry has 5 firms, and is found to have violated antitrust laws. The government breaks it up into 10 firms that will share the market equally. As a result of this government action, the Herfindahl index for the industry would change from: to .

Answer:

2,000 to 1,000

Explanation:

The Herfindahl-Hirschman Index, HHI, is measured by using the market share of each firm in the industry, then square them, and sum the result.

However, supposing that there were only one firm in an industry, that firm would have 100% market share, and the Herfindahl-Hirschman Index (HHI) would equal 10,000, indicating a monopoly.

Thus, in this case, it was initially 5 firms, with no special market share allocated to each of the firm, hence, it is assumed they shared the market share equally, and that will be 2,000 HHI. This shown by each of the 5 firms having 20% market share

HHI = 20² + 20² + 20² + 20² + 20² = 2,000

At the same time, since the government breaks the industry up into 10 firms that will share the market equally. Then, the Herfindahl index will be 1,000. This is shown by HHI = 10² * 10 (since it involves 10 firms with equal share of the market) = 1,000.

Therefore, The Herfindahl index for the industry would change from: 2,000 to 1,000.

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