the result that Firm B will lose 90% of what it gained by cheating. Firm A will reason that Firm B is unlikely

to risk cheating. If neither firm cheats, Firm A earns $1000. If Firm A cheats, assuming Firm B does not

cheat, A can boost its profits only a little, since Firm B is so small. If both firms cheat, then Firm A loses at

least 50% of what it could have earned. The possibility of a small gain ($50) is probably not enough to

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induce Firm A to cheat, so in this case it is likely that both firms will collude.

Chapter 11

1. Yes, it is true. The HHI example is easy enough: since the market shares of all firms are included in the HHI

calculation, a merger between two of the firms will change the HHI. For the four-firm concentration ratio, it

is quite possible that a merger between, say, the fifth and sixth largest firms in the market could create a
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