Answer the questions below.
a.What measure is used by banking authorities who wish to calculate the degree of monopoly power in a banking market (give the name or the acronym)? Write the equation that is used and describe what each term means. b.Suppose the banking market in Charlottesville consists of five banks that each having a market share of 15 percent and five more banks each having a market share of 5 percent. Calculate the measure of monopoly power.
c.Three of the banks that currently have 15 percent of the market would like to merge and form First Super Bank of Charlottesville. If the merger were allowed, calculate the new measure of monopoly power. d.Under the standard set of guidelines of the U.S. Department of Justice, would the merger be allowed? Explain why or why not, describing the guidelines and your results from parts (b) and (c).
What will be an ideal response?
| a. | The Herfindahl-Hirschman Index (HHI) is defined as | |
 , | ||
| where the terms on the right-hand side of the equation are the squared values of the market shares of each bank (in percentage terms). A higher HHI means greater monopoly power in the banking market. | ||
| b. | HHI | = (5 × 152) + (5 × 52) |
| = (5 × 225) + (5 × 25) | ||
| = 1,250 | ||
| c. | HHI | = 452 + (2 × 152) + (5 × 52) |
| = 2,025 + (2 × 225) + (5 × 25) | ||
| = 2,600 | ||
| d. | Merger would not be allowed, as new HHI > 1,800 and change in HHI > 200 (also, could note that market share of new bank > 35 percent). | |
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