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?

The following are the approximate market shares of different brands of soft drinks during the 1980s:

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 post-merger Herfindahl. What assumptions did you make?

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?

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