Herfindahl-Hirschman at the Movies (Part 2)

Click here to read Part 1. It discusses the possible Disney-Fox merger. Below I talk about merger guidelines and which mergers the government might try to block.

This post deals with market shares of film studios this year. See ‘Black Panther,’ ‘Avengers’ Top Record 2018 Box Office: Hit films generated a disproportionate share of estimated $11.8 billion domestic haul by Erich Schwartzel of The WSJ.

The Justice Department uses the Herfindahl–Hirschman Index (HHI). The market share of each firm in an industry is squared and then all those numbers are added up to get the HHI. There are 3 categories according to Justice:

Unconcentrated Markets: HHI below 1500
Moderately Concentrated Markets: HHI between 1500 and 2500
Highly Concentrated Markets: HHI above 2500

If two firms merge, how likely or unlikely that the merger will be challenged depends on which of the above three categories the industry will be in once the merger takes place and how much the HHI changes as a result of the merger (again, this information is below).

So which one of the three cases above fits the movie industry (at least for 2018)? The WSJ article linked above has market shares. They are

Studio	%Share	Squared
Disney	26	676
Universal	17	289
Warner	15	225
20th/Fox	11	121
Sony	11	121
Paramount	6	36
Total	86	1468

The missing 14% is made up by all the other firms. If that 14% is made up by two firms with 5% each and one with 4% then that would add another 5² + 5² + 4²  =  66. If we add that to 1,468, it puts the HHI over 1,500 (1,534). But if each of the other firms has just 1% each it would only add 14 to the HHI since 1 squared is just 1. That would get us 1,482. So the movie industry is between 1,482 and 1,534). It may be Unconcentrated or Moderately Concentrated.

But even if it is Moderately Concentrate, it would still be on the low end of that category. So it is probably not that threatening to consumers.

Disney and Fox are merging. How much will the HHI increase as a result of that merger? We find that by 2*26*11 = 572. Adding that to either 1,482 or 1,534 would put the HHI over 2,000. What would the Justice Department guidelines say about that? They say that this merger is likely to be challenged.

But it was approved. Disney was required to sell Fox’s regional sports networks because Disney owns ESPN. Of course, that has nothing to do with movies

See Horizontal Merger Guidelines.  But here is an excerpt:

"Based on their experience, the Agencies generally classify markets into three types:

• Unconcentrated Markets: HHI below 1500
• Moderately Concentrated Markets: HHI between 1500 and 2500
• Highly Concentrated Markets: HHI above 2500

The Agencies employ the following general standards for the relevant markets they have defined:

• Small Change in Concentration: Mergers involving an increase in the HHI of less than 100 points are unlikely to have adverse competitive effects and ordinarily require no further analysis.
• Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.
• Moderately Concentrated Markets: Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny.
• Highly Concentrated Markets: Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.

The purpose of these thresholds is not to provide a rigid screen to separate competitively benign mergers from anticompetitive ones, although high levels of concentration do raise concerns. Rather, they provide one way to identify some mergers unlikely to raise competitive concerns and some others for which it is particularly important to examine whether other competitive factors confirm, reinforce, or counteract the potentially harmful effects of increased concentration. The higher the post-merger HHI and the increase in the HHI, the greater are the Agencies’ potential competitive concerns and the greater is the likelihood that the Agencies will request additional information to conduct their analysis."

 Related posts:

The Herfindahl-Hirschman Index & The Anheuser-Busch InBev/Grupo Modelo Merger

Is The Airline Industry An Oligopoly? 

How concentrated are U.S. industries?