New merger guidelines from The Federal Trade Commission and Department of Justice (as they relate to the Herfindahl-Hirschman Index (HHI))

See Merger Guidelines: U.S. Department of Justice and the Federal Trade Commission. This PDF document is 50 pages long, so there is alot more to it than just the HHI.

See also The feds just laid out new guidelines for approving mergers — here they are by Lauren Feiner CNBC.

First I will show some things about the HHI and the old guidelines (which were enacted around 2010). Then I will show what the new HHI guidelines are.

Herfindahl-Hirschman Index (HHI)-a measure of market concentration obtained by squaring the market share of each firm in the industry and then summing these numbers. “The sum of the squares of the market shares." 

Example:

Firm A-40%

Firm B-30%

Firm C-20%

Firm D-10%

(notice that the %’s add up to 100)

HHI = 40² + 30² + 20² + 10²

HHI = 1600 + 900 + 400 + 100

HHI = 3000

By squaring the market share, we add extra emphasis to bigness. If a firm doubled its market share from 10% to 20%, under HHI the impact on competition has more than a doubling effect because 20 squared is 400, which is 4 times larger than 100 (or 10 squared, the firm’s previous share squared). So every 1-percentage point gain in market share hurts competition by more than 1% using HHI.

Old Justice Department Guidelines

Competitive Market: HHI < 1500

Moderately Concentrated: 1500 ≤ HHI ≤ 2500

Highly Concentrated: 2500 ≤ HHI

Mergers involving an increase in the HHI of less than 100 points are unlikely to be challenged.

Mergers resulting in unconcentrated markets are unlikely to be challenged

Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points are likely to be challenged

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.

Now some facts about the new guidelines.

"Markets with HHI between 1,000 and 1,800 are referred to as “concentrated markets.”" (prior to 2010 those cases were considered moderately concentrated).

"Markets with post-merger HHI greater than 1,800 are highly concentrated" (this is the level they had before 2010).

"A merger causes undue concentration and triggers a structural presumption that the merger may substantially lessen competition or tend to create a monopoly when it would result in a highly concentrated market and produce an increase in the HHI of more than 100 points."

"The more concentrated a market with an HHI above 1,000, the more likely the Agencies are to conclude that the market structure suggests susceptibility to coordination."

Also

"the Agencies consider whether the merger would occur in a market or industry sector where there is a significant tendency toward concentration. That trend may be toward horizontal concentration, or it may be a “trend toward vertical integration” that would ultimately result in the “foreclosure of independent manufacturers from markets otherwise open to them.” That trend can be established by market structure, for example as a steadily increasing HHI exceeds 1,000 and rises toward 1,800. Or it can be reflected in other market characteristics, such as the exit of significant players or other factors driving concentration."

"the Agencies examine whether the merger would increase the existing level of concentration or the pace of that trend. That may be established by a significant increase in concentration, such as a change in HHI greater than 200, or it may be established by other facts showing the merger would increase the pace of concentration."