After the passing of the Sherman Antitrust Act in 1890, the Department of Justice enforced the antitrust laws and governed the outcome of possible mergers. They regulated all sorts of business practices even include chemical mergers and acquisitions. Beginning in 1982, economists played a large role in developing the merger guidelines for the DoJ and FTC. These guidelines were developed to provide businesses with more information about the merger and acquisition process. The three main aspects include:
Market definition- A market is defined as consisting of all businesses that produce what consumers consider to be close substitutes. A market is considered to have too small of a definition if a price increase in their products results in a decrease of revenue because consumers can substitute away to another good.
Measure of concentration- A standard concentration measure is called the Herfindahl-Hirschman Index (HHI). The index consists of the sum of the squares of the market share for each firm within a given market. Some examples of calculating the Herfindahl-Hirschman index are shown below:
A monopoly, or one firm with 100% market share would like look like:
HHI = 100^2 = 10,000 (the highest possible measure)
A market with three firms with 33% market share each would look like:
HHI = 33^2 + 33^2 + 33^2 = 3,268
A market with nine firms each with 11% concentration would look like:
HHI = 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + 11^2 + = 1,089
Merger standards- Mergers are typically approved if the HHI value is below 1,000. For example, a chemical m&a attempt in a market with an HHI under 1,000 signifies a competitive market. Anything above 1,800 is likely to be challenged if the merger increases the HHI by over 50.