Antitrust laws aim to promote competition and prevent monopolies. They impact corporate mergers by requiring government review and approval for larger deals. These laws ensure mergers don't lead to higher prices, lower quality, or reduced innovation for consumers.

Concentration ratios and the Herfindahl-Hirschman Index measure market dominance. These tools help regulators assess potential anticompetitive effects of mergers. Approaches to merger regulation include premerger notification, behavioral remedies, and structural remedies to maintain competition.

Antitrust Laws and Corporate Mergers

Purpose of antitrust laws

• Promote competition and prevent monopolies from forming or abusing their market power
• Sherman Act (1890) prohibits anticompetitive agreements (price fixing) and monopolization
• Clayton Act (1914) addresses specific practices like mergers and acquisitions that may substantially lessen competition (vertical integration)
• Federal Trade Commission Act (1914) established the FTC to enforce antitrust laws and protect consumer interests
• Impact corporate mergers by requiring government review and approval for mergers above a certain size (Hart-Scott-Rodino Act)
• Block mergers that would significantly reduce competition or create monopolies (AT&T and T-Mobile merger blocked in 2011)
• Ensure mergers do not lead to higher prices, lower quality, or reduced innovation for consumers

Concentration ratios for market dominance

• Measure the combined market share of the largest firms in an industry to assess market concentration
• Four-firm concentration ratio (CR4) sums the market shares of the four largest firms (Hershey, Mars, Nestle, Ferrero in U.S. chocolate market)
• Eight-firm concentration ratio (CR8) sums the market shares of the eight largest firms
  • Determine the relevant market (U.S. smartphone market) and identify the largest firms (Apple, Samsung, LG, Motorola)
  • Calculate each firm's market share as a percentage of total industry sales
  • Sum the market shares of the largest four (CR4) or eight (CR8) firms
• Interpreting concentration ratios
  • CR4 above 80% or CR8 above 90% indicates a highly concentrated market with potential for market dominance and reduced competition
  • Lower concentration ratios suggest a more competitive market with many firms (CR4 below 40%)

Measuring Market Concentration

Herfindahl-Hirschman Index for concentration

• More comprehensive measure of market concentration than concentration ratios
• Calculating HHI
  1. Determine the relevant market (U.S. ride-sharing market) and identify all firms (Uber, Lyft, Via)
  2. Calculate each firm's market share as a percentage of total industry sales
  3. Square each firm's market share and sum the squared values
  4. Formula: $HHI = \sum_{i=1}^{n} (market share_i)^2$
• Interpreting HHI
  • Ranges from 0 to 10,000 (0 to 1 if market shares are expressed as decimals)
  • Below 1,500 indicates an unconcentrated market with many competitors
  • Between 1,500 and 2,500 indicates a moderately concentrated market (U.S. airline industry)
  • Above 2,500 indicates a highly concentrated market with potential for market power abuse
• HHI and mergers
  • Mergers resulting in an HHI increase of more than 200 points in concentrated markets raise antitrust concerns
  • Antitrust authorities (DOJ, FTC) use HHI to assess the potential impact of mergers on market concentration

Approaches to merger regulation

• Premerger notification and review under the Hart-Scott-Rodino Act (1976)
  • Companies must notify antitrust authorities of proposed mergers above a certain size ($94 million as of 2020)
  • Authorities review mergers to assess potential anticompetitive effects and may challenge or block problematic mergers
• Behavioral remedies
  • Approve mergers with conditions to mitigate anticompetitive effects
  • Require the merged firm to divest assets, license technology, or agree to certain business practices (Ticketmaster and Live Nation merger)
• Structural remedies
  • Require the merging firms to divest certain assets or business units to maintain competition
  • Divestitures aim to create viable competitors and preserve market structure (Anheuser-Busch InBev and SABMiller merger)
• Challenges and enforcement
  • Antitrust authorities may file lawsuits to block mergers that violate antitrust laws (AT&T and Time Warner merger)
  • Courts assess mergers based on their likely effect on competition and consumer welfare using the rule of reason approach

Types of Corporate Mergers

• Horizontal merger: Combination of two companies in the same industry and at the same stage of production
• Vertical merger: Integration of companies at different stages of production or distribution in the same industry
• Conglomerate merger: Combination of firms in unrelated industries
• Potential benefits of mergers:
  • Synergy: Combined entity is more valuable than the sum of its parts
  • Economies of scale: Increased efficiency and cost savings due to larger production scale