The following are the approximate U.S. market shares of different brands of soft drinks: Coke-45% Pepsi-30% Dr. Pepper/7-Up-15% All other brands-10%.
a. Compute the Herfindahl for the soft-drink market. Suppose that Pepsi acquired Dr. Pepper/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 defining the market as something other than soft drinks. What market definition might they propose? Why would this change the Herfindahl?