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?