According to the Horizontal Merger Guidelines that the U.S. Department of Justice and the Federal Trade Commission issued in 1992 (revised in 1997), concentration is measured using the HHI, as follows:
a) Post-Merger HHI Below 1000. The Agency regards markets in this region to be unconcentrated. Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.
b) Post-Merger HHI Between 1000 and 1800. The Agency regards markets in this region to be moderately concentrated. Mergers producing an increase in the HHI of less than 100 points in moderately concentrated markets post-merger are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 100 points in moderately concentrated markets post-merger potentially raise significant competitive concerns.
c) Post-Merger HHI Above 1800. The Agency regards markets in this region to be highly concentrated. Mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets post-merger, are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets post-merger potentially raise significant competitive concerns.
In our example with the nine firms (See Friday, March 10, 2006), suppose that the two smaller firms want to merge. The initial HHI is 1540 and the postmerger HHI is 1580 (8 firms with market shares 25, 20, 15, 10, 9, 8, 7 and 6). Because the postmerger HHI is between 1000 and 1800, and the change does not exceed 100, the merger does not raise concerns about competition. Now think the possibility that the 2 largest firms want to merge. The postmerger HHI is 2540 (8 firms with market shares 45, 15, 10, 8, 7, 6, 5 and 4). Because the postmerger HHI exceeds 1800, and the change in the HHI exceeds 50, concerns about competition are raised.