11.1 Corporate Mergers

Corporate mergers can reshape industries, impacting competition and consumer welfare. When companies join forces, it often leads to increased market concentration, potentially resulting in higher prices and less innovation. This dynamic plays a crucial role in how markets function.

Antitrust laws aim to keep markets competitive by preventing monopolies and unfair practices. Regulators use tools like concentration ratios and the Herfindahl-Hirschman Index to measure market power. These metrics help identify when mergers might harm competition, guiding decisions to protect consumers and maintain market health.

Corporate Mergers and Market Competition

Market Concentration

• Mergers and acquisitions increase market concentration by reducing the number of firms in the market, giving each remaining firm a larger market share and decreasing competition
• Increased market concentration can lead to higher consumer prices, lower quality goods and services, and decreased innovation and technological advancement due to reduced competitive pressure
• Horizontal mergers (merging of firms producing similar goods or services) directly reduce the number of competitors within an industry
• Vertical mergers (merging of firms at different production stages) can lead to foreclosure, limiting competitors' access to inputs or distribution channels
• Conglomerate mergers (merging of firms in unrelated industries) may not directly impact competition within a specific market but can still increase market power and potential anticompetitive behavior

Antitrust Regulations

• Antitrust laws (Sherman Act, Clayton Act, Federal Trade Commission Act) prevent anticompetitive practices and promote fair competition by prohibiting monopolization, restraint of trade, price discrimination, and tying
• Department of Justice and Federal Trade Commission enforce antitrust laws by reviewing proposed mergers and acquisitions for potential anticompetitive effects and taking legal action against firms engaging in anticompetitive practices
• Antitrust regulations maintain a competitive market environment by preventing the formation of monopolies or oligopolies with excessive market power, encouraging firms to compete on price, quality, and innovation, and protecting consumer welfare through access to a variety of competitively priced goods and services

Market Concentration Measures

• Concentration ratios (CR4, CR8) measure the combined market share of the largest firms in an industry by summing their market shares; higher ratios indicate a more concentrated market and potentially less competition
• Herfindahl-Hirschman Index (HHI) comprehensively measures market concentration by summing the squared market shares of all firms in the industry ($HHI = \sum_{i=1}^{N} s_i^2$, where $s_i$ is the market share of firm $i$ and $N$ is the number of firms), ranging from 0 (perfect competition) to 10,000 (monopoly)
• U.S. Department of Justice considers markets with an HHI below 1,500 as unconcentrated, between 1,500 and 2,500 as moderately concentrated, and above 2,500 as highly concentrated
• High concentration does not always imply anticompetitive behavior but can be a red flag for potential market power issues; changes in concentration measures over time can indicate the impact of mergers and acquisitions on market structure
• Antitrust authorities use concentration measures as a screening tool to identify mergers that may require further investigation