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Source: Economic Report of the President, January 2001, p. 41.

horizontal merger guidelines

Government approval standards for combinations among competitors change. Mergers do not have to create monopoly to result in higher prices and lower output. Greater industry concentration can make it easier for firms to communicate their intentions, and the interests of competitors may be less likely to diverge. For example, mergers can make price cutting less profitable by reducing customer alternatives. This is especially true when merging firms feature powerful brands that are particularly close substitutes.

Enforcement agencies must balance concerns about market power against the efficiencies mergers can make possible. There are several ways in which mergers can reduce costs. Mergers can allow one firm to take advantage of another's superior technology and allow merging firms to specialize in activities that each does best. Mergers may also increase efficiency by eliminating fixed costs or allowing longer production runs.

The challenge for effective antitrust enforcement is to prevent mergers and competitive practices that harm consumers but to allow those that create substantial benefits. To evaluate the market power and the efficiency effects of mergers, the FTC and the Department of Justice (DOJ) use a jointly derived framework called horizontal merger guidelines. Steps taken in merger reviews are as follows:

• Define the relevant market and calculate its concentration before and after the merger.

• Assess whether the merger raises concerns about adverse competitive effects.

• Determine whether entry by other firms into the market would counteract those effects.

• Consider any expected efficiency gains.

Remember from Chapter 11 that industry concentration is measured by the Herfindahl Hirschmann Index (HHI), a measure named after the economists who invented it. Calculated in percentage terms, the HHI is the sum of the squared market shares for all n industry competitors:

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