The US Department of Justice (DoJ) Uses the Herfindahl Index to to Evaluate

Essay

The U.S. Department of Justice (DoJ) uses the Herfindahl Index to evaluate the impact of a proposed horizontal merger between firms on the degree of market concentration. The following text is an extract of the official document found in 2003 on the DoJ Web site:
Market concentration is a function of the number of firms in a market and their respective market shares. As an aid to the interpretation of market data, the Agency will use the Herfindahl-Hirschman Index ("HHI") of market concentration. The HHI is calculated by summing the squares of the individual market shares of all the participants […].
The Agency divides the spectrum of market concentration as measured by the HHI into three regions that can be broadly characterized as unconcentrated (HHI below 1,000), moderately concentrated (HHI between 1,000 and 1,800), and highly concentrated (HHI above 1,800). Although the resulting regions provide a useful framework for merger analysis, the numerical divisions suggest greater precision than is possible with the available economic tools and information. Other things being equal, cases falling just above and just below a threshold present comparable competitive issues.
1.51 General Standards
In evaluating horizontal mergers, the Agency will consider both the post-merger market concentration and the increase in concentration resulting from the merger. Market concentration is a useful indicator of the likely potential competitive effect of a merger. The general standards for horizontal mergers are as follows:
a. Post-Merger HHI below 0.10. The Agency regards markets in this region to be unconcentrated. Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.
b. Post-Merger HHI between 0.10 and 0.18. The Agency regards markets in this region to be moderately concentrated. Mergers producing an increase in the HHI of less than 0.01 points in moderately concentrated markets, post-mergers are unlikely to have adverse competitive consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 0.01 points in moderately concentrated markets, post-mergers potentially raise significant competitive concerns depending on the factors set forth in