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For example, a market consisting of four firms with market shares of 30 percent, 30 percent, 20 percent, and 20 percent has an HHI of 2,600 (= 302 + 302 + 202 + 202). Although it is desirable to include all firms in the calculation, lack of information about small firms is not critical because such firms do not affect the HHI significantly. A monopoly industry with a single dominant firm is described by a four-firm concentration ratio of 100 percent, or CR4 = 100, and a HHI = 1002 = 10,000. A vigorously competitive industry where each of the leading four firms enjoys market shares of 25 percent is also described by a CR4 = 100, but features a HHI = 252 +252 +252 +252 = 2,500. Like the four-firm concentration ratio, the HHI approaches zero for industries characterized by a large number of very small competitors.

When a merger occurs, or a pending merger is proposed, the increase in concentration as measured by the HHI can be calculated by doubling the product of the market shares of the merging firms. For example, the merger of firms with 5 percent and 10 percent shares of the market would increase the HHI by l00 (= 2 X 5 X 10). To see this is the case, simply recall that in calculating the HHI before the merger, the market shares of merging firms are squared individually, or a2 + b2. After the merger, the sum of those individual firm market shares would be squared, or (a + b)2, which equals a2 + 2ab + b2. The merger-induced increase in the HHI, therefore, is represented by 2ab, which is the product of two times the market shares of the merging firms.

In evaluating horizontal mergers, the FTC and DOJ consider both the post-merger market concentration and the increase in concentration resulting from the merger as potentially useful indicators of competitive implications. According to horizontal merger guidelines, the general standards for horizontal mergers are as follows:

1. Unconcentrated Markets with Post-Merger HHI Below 1,000. Mergers resulting in relatively unconcentrated markets are not likely to have adverse competitive effects and ordinarily will be approved.

2. Moderately Concentrated Markets with Post-Merger HHI Between 1,000 and 1,800. Mergers producing an increase in the HHI of less than 100 points in moderately concentrated markets are unlikely to have adverse competitive consequences and ordinarily will be approved. Mergers producing an increase in the HHI of more than 100 points in moderately concentrated markets have the potential to raise significant competitive concerns and would be scrutinized.

3. Highly Concentrated Markets with Post-Merger HHI Above 1,800. Mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets, are unlikely to have adverse competitive consequences and ordinarily will be approved. Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets have the potential to raise significant competitive concerns and would be scrutinized. Where the post-merger HHI exceeds 1,800, it will be presumed that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power and would ordinarily not be approved.

Although the FTC and DOJ realize that the post-merger level of market concentration and the change in concentration resulting from a merger affect the degree to which a merger raises competitive concerns, both recognize that market concentration data sometimes misstate the competitive significance of a given merger. For example, changes in technology can make long-entrenched rivals susceptible to innovative products produced by new foreign or domestic competitors. Changes in technology also have the potential to reshape the demand for substitutes outside historically relevant markets. Recent advances in the satellite transmission of voice and data communication have clearly reduced the market power of local telecommunications and cable television companies. Similarly, the exploding use of the Internet allows customers to compare the price and performance of goods and services offered by both local and distant providers.

It is from within this framework that recent antitrust policy initiatives can be evaluated.

network externality

Added value that new users add to network goods and services

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