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Monopolistic Competition and Oligopoly
The Role of Government: Regulation of Mergers

Regulation of Mergers

The Clayton Act of 1914 (as mentioned in Chapter 12) gave the government the authority to limit mergers that might “substantially lessen competition in an industry.” The Celler-Kefauver Act of 1950 enabled the Department of Justice to monitor and enforce these provisions.

In 1968, the Department of Justice issued its first guidelines designed to reduce uncertainty about the mergers it would find acceptable. The 1968 guidelines were strict; for example, if the largest four firms in an industry controlled 75 percent or more of the market, an acquiring firm with a 15 percent market share would be challenged if it wanted to acquire a firm that controlled as little as an additional 1 percent of the market!

In 1982, a new set of far more lenient guidelines were issued. Revised in 1984, they remain in place today. The 1982/1984 standards are based on a measure of market structure called the Herfindahl-Hirschman Index (HHI).

The HHI is calculated by finding the market share of each firm in an industry, then squaring that number, and finally, adding the numbers. For instance, if there were three firms in an industry, one with 50% of the industry, one with a 35% share, and the third with 15%, the HHI calculation would be:

(50)2 + (35)2 + (15)2 = 3,950

By squaring the market share, the HHI is placing a higher value on firms that have higher market shares. The table below shows HHI calculations for four hypothetical industries.

Table 13.5.gif

When the HHI is above 1,000, the Department of Justice (DOJ) considers the industry moderately concentrated. When the HHI is above 1,800, the DOJ considers the industry concentrated. The DOJ will oppose any merger that raises the HHI more than 50 points, if the HHI is already over 1,800, and will oppose any merger that raises the HHI more than 100 points, if the HHI is between 1,000 and 1,800.

In 1992, the DOJ and the FTC issued joint Horizontal Merger Guidelines updating and expanding the 1984 guidelines. The most interesting part of the new provisions is that the government will examine each potential merger to determine if it enhances the firms’ power to engage in “coordinated interaction” with other firms in the industry. “Coordinated interaction” is defined as “actions by a group of firms that are profitable for each of them only as the result of the accommodating reactions of others. This behavior includes tacit or express collusion, and may or may not be lawful in and of itself.”


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