The following are the approximate Canadian market shares of different brands of soft drinks:

Brand Market Share

Coke 45%

Pepsi 30%

Dr. Pepper 7.5%

Sprite 7.5%

Other 10%

a) Calculate the Herfindahl Index for the soft drink market.

b) Suppose that Pepsi acquired Dr. Pepper and Sprite. Compute the post-merger Herfindahl Index.-

c) What is the economics interpretation of the inverse of the Herfindahl Index that you calculated in a) and b)?