A Comparison of the HHI and the Procurement-Based Framework in Merger Review
by Kenneth Gong
Abstract
The Herfindahl-Hirschman Index (HHI), a measure of market concentration, plays a critical role in the U.S. Merger Guidelines. It is used as a threshold metric that marks certain mergers as potentially harmful to consumers. However, the microfoundations for the HHI are grounded in the Cournot oligopoly model, which may not be an appropriate foundation for certain markets, particularly those in which buyers purchase through competitive procurements. Recent developments in Incomplete Information Industrial Organization (IIIO) allow merger analysis to be tailored to such procurement-based markets. While IIIO methods allow one to calculate the probability of an increase in price (PIP) as a result of a horizontal merger, until now no work has been done to compare the HHI approach to merger review with the IIIO approach. In this paper, we find that the IIIO approach is largely consistent with the 2023 Merger Guidelines in that we agree that both the post-merger HHI and the change in HHI should be used in merger review, however our results place greater emphasis on the change in HHI in terms of predictive power of the PIP.
Professor Leslie Marx, Faculty Advisor
Professor Michelle Connolly, Faculty Advisor
JEL Codes: L4, L41, L44
Optimizing the Electricity Bill Creating a two-part electricity tariffs to induce a targeted level of rooftop solar adoption while meeting utility operating expenses
By Hoel Weisner
Renewable energy technologies are a much needed, clean alternative to the conventional fossil fuel electricity power plants of the last century. The market for installing solar panels on rooftops is a highly promising avenue for expanding the use of these technologies, but its profitability depends significantly on the electricity prices offered by electric utilities. Investing in solar panels offset a percentage of the electricity purchased from the utility. This paper models the investment decision of electricity consumers and looks at what the optimal per unit price of electricity should be in order to make building solar panels a profitable decision for a target share of households. The model shows how this optimal rate decreases at lower prices of investing, when the share of utility-purchased electricity offset by the panels increases, and when the target level of solar adoption decreases. Finally, it looks at how this per unit rate impacts the utility’s decision to set a fixed monthly charge for electricity in order to recover all of its operating expenses.
Advisor: Leslie Marx, Alison Hagy, Kent Kimbrough | JEL Codes: L94, Q42, Q48 | Tagged: Electricity Price, Renewable Energy, Solar Electricity
Market Power & Reciprocity Among Vertically Integrated Cable Providers
By Jeffery Shih-kai Shen
This paper seeks to investigate the effects of vertical integration on the cable industry. There are two main goals that the research paper will attempt to address. The first is to build upon existing research on favoritism shown by multichannel video programming distributors (MVPDs) to affiliated video programming networks. Second, the paper will use 2007 and 2010 industry data to investigate the possible existence of “quid pro quo” among vertically integrated MVPD cable providers. After evaluating the data with multivariate OLS Regressions, the evidence suggests that MVPD cable providers do tend to carry their own affiliated programming networks. Furthermore, the evidence supports the hypothesis that reciprocity relationships exist among major vertically integrated cable providers.
Advisors: Leslie Marx | JEL Codes: C01, D22, K21 | Tagged: Cable Provider, Empirical Analysis, Programming Distributor, Programming Network, Vertical Integration
Collusion with Three Bidders at First-Price Auctions
By Andrew Born
Lopomo, Marx, & Sun (2009) show that, given a speci fied environment, pro table collusion is not possible for a two-person bidding ring operating at a fi rst-price sealed-bid auction. This research investigates the rigor of their result by expanding the theoretical framework to the case of a three-bidder cartel. The output generated from the linear programming model con firms the authorsearlier result. This is a key finding as it is the first to establish a basis for comparison of equilibrium surplus scenarios among multiple-bidder auction formats. The analytic and numerical results pave the way for future research examining the effect of cartel size on profi tability and have many real-world implications for both private and public policy alike.
Advisor: Leslie Marx | JEL Codes: C57
