Suppose that the widget industry has a Herfindahl-Hirschman index of 1,200 . Two firms have proposed a merger. Firm A has a current market share of 5 percent. Firm B has a market share of 7 percent

Will the Justice Department challenge the merger? Explain.

The merger will raise the Herfindahl-Hirschman index by 70 points [(122) - (52) - (72)]. Since the industry is only moderately concentrated, the Justice Department will only challenge a merger that increases the index by more than 100 points. Therefore, the merger will not be challenged.