In 2001, HP acquired Compaq. The merger had an impact on two different markets: desktop PCs and servers. Pre-merger market shares in the desktop PC market were as follows: Dell, 13; Compaq, 12; HP, 8; IBM, 6; Gateway, 4. Pre-merger market shares in the servers market were as follows: IBM, 26; Compaq, 16; HP, 14; Dell, 7. Source: Bank of America report, October 2001. Data for 2001Q2.
(a) Determine the value of HHI in each market before the merger.
(b) Assuming market shares of each firm remain constant, determine the value of HHI after the merger.
(c) Considering the values determined above and the DoJ merger guidelines, was the Department of Justice right in allowing the merger to take place?

Answer:

HP and Compaq

Value of HHI          Desktop PC         Servers

a) Before the merger   429                   1,177

b) After the merger      621                   1,616

c) Considering the HHI values determined in the various markets above (before and after the merger) and the DoJ merger guidelines, the DoJ seems to be right in allowing the merger to take place with respect to the desktop PC market as the 200 basis point mark was not reached.  This is not the same with respect to the servers market, where the combined value of HP Compaq exceeds the 200 basis point mark.

Explanation:

a) Data and Calculations:

Pre-merger market shares in the desktop PC and servers markets:

           Desktop PC   Servers

               Market       Market

Dell,            13                 7

Compaq,    12               16

HP,              8                14

IBM,            6               26

Gateway,   4                  0

HHI in the desktop PC market = 13² + 12² + 8² + 6² + 4²

= 169 + 144 + 64 + 36 + 16

= 429

HHI in the servers market = 7² + 16² + 14² + 26² + 0² =

= 49 + 256 + 196 + 676

= 1,177

After the merger:

                Desktop PC   Servers

                    Market       Market

Dell,                   13                 7

HP Compaq    20               30

IBM,                   6               26

Gateway,          4                  0

HHI in the desktop PC market = 13² + 20² + 6² + 4²

= 169 + 400 + 36 + 16

= 621

HHI in the servers market = 7² + 30² + 26² + 0²

= 40 + 900 + 676

= 1,616

Value of HHI          Desktop PC         Servers

a) Before the merger   429                   1,177

b) After the merger      621                   1,616

Market power of Compaq and HP in the desktop PC market before the merger = 208/429 = 48.5% (144 + 64)/429

Market power of HP Compaq in the desktop PC market after the merger = 400/621 = 64.4%

Increase in basis point (HHI) = 192 (621 = 429)

Market power of Compaq and HP in the servers market before the merger = 452/1,177 = 38.4% (256 + 196)/1,177

Market power of HP Compaq in the servers market after the merger = 900/1,616 = 55.7%

Increase in basis point (HHI) = 439 (1,616 - 1,1177)

Write a professional 1 page memo that responds to this problem.
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