After the passing of the Sherman Antitrust Act in 1890, the
Department of Justice enforced the antitrust laws and governed the outcome of
possible mergers. They regulated all
sorts of business practices even include chemical mergers and acquisitions. Beginning in 1982,
economists played a large role in developing the merger guidelines for the DoJ
and FTC. These guidelines were developed
to provide businesses with more information about the merger and acquisition
process. The three main aspects include:
Market definition- A market is defined as consisting of all
businesses that produce what consumers consider to be close substitutes. A market is considered to have too small of a
definition if a price increase in their products results in a decrease of
revenue because consumers can substitute away to another good.
Measure of concentration- A standard concentration measure
is called the Herfindahl-Hirschman Index (HHI).
The index consists of the sum of the squares of the market share for
each firm within a given market. Some
examples of calculating the Herfindahl-Hirschman index are shown below:
A monopoly, or one firm with 100% market share would like
look like:
HHI = 100^2 = 10,000 (the highest possible measure)
A market with three firms with 33% market share each would
look like:
HHI = 33^2 + 33^2 + 33^2 = 3,268
A market with nine firms each with 11% concentration would
look like:
HHI = 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2
+ 11^2 + 11^2 + = 1,089
Merger standards-
Mergers are typically approved if the HHI value is below 1,000. For example, a chemical m&a attempt in a
market with an HHI under 1,000 signifies a competitive market. Anything above 1,800 is likely to be
challenged if the merger increases the HHI by over 50.
