9. The following are the approximate market shares of different brands of soft drinks during the 1980’s: Coke—40%; Pepsi—30%; 7-Up—10%; Dr. Pepper—10%; All other brands—10%.
a. Compute the Herfindahl for the soft drink market. Suppose Pepsi acquired 7-Up. Compute the most merger Herfindahl. What assumptions did you make?
.4^2 + .3^2 + .1^2 + .1^2 = Herfindahl index = .16+.09+.01+.01 = 0.27
If Pepsi and 7-Up merged:
.4^2 + .4^2 + .1^2 = Herfindahl index = .16+.16+.01 = 0.33
The assumptions of the above include that the market shares of firms in the industry do not change as a result of the merger of two players (Pepsi and 7-Up).
b. Federal antitrust agencies would be concerned to see a Herfindahl increase of the magnitude you computed in (a), and might challenge the merger. Pepsi could respond by offering a different market definition. What market definitions might they propose? Why would this change the Herfindahl?
Pepsi should consider a market definition that would cause the market shares of firms to appear more fragmented. That is, Pepsi should attempt to increase the size of the denominator that determines its market share. For example, Pepsi might argue that the market definition is the “junk food market” – which includes chips and candy. This would have the affect of making the market Pepsi competes in more fragmented.