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

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