## 1.5 Concentration and Market Shares

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Market concentration is a f unction 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-Hir schman Index ("HHI") of market concentration. The HHI is calculat ed by summing the squares of the individual market shares of all the participants. (17) Unlike the four-firm concentrati on ratio, the HHI reflects both the distribution of the market shares of the top four firms and the composition of the market outside the top four firms. It also gives proportionately greater weight to the market shares of the larger firms, in accord with their relative importance in competitive interactions.
The Agency divides the spectrum of market conc entration as measured by th e HHI into three regions that can be broadly characterized as unconcentrated (HHI below 1000) , moderately concentrated (HHI between 1000 and 1800), and highly concentrated ( HHI above 1800). Although the resulting regions provide a useful framework for merger analysis, the num erical divisions suggest greater precision than is possible with the available economic tools and inform ation. Other things being equal, cases falling just above and just below a threshold pres ent comparable competitive issues.


## 1.51 General Standards

In evaluating horizontal mergers, the Agency wi ll consider both the post-me rger market concentration and the increase in concentrati on resulting from the merger. (18) Market concentration is a useful indicator of the likely potential competitive effect of a merg er. The general standards fo r horizontal mergers are as follows:

a) Post-Merger HHI Below 1000. 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 1000 and 1800. The Agency re gards markets in this region to be moderately concentrated. Mergers producing an increase in the HHI of less than 100 points in moderately concentrated markets post-merger are unlikely to haveadverse competitive consequences and ordinarily require no further analysis. Merger s producing an increase in the HHI of more than 100 points in moderately concentrated markets pos t-merger potentially raise signifi cant competitive concerns depending on the factors set forth in Sections 2-5 of the Guidelines.
c) Post-Merger HHI Above 1800. The Agency regards ma rkets in this region to be highly concentrated. Mergers producing an increase in the HHI of less than 50 points, even in highly concentrated markets post-merger, are unlikely to have adverse competitiv e consequences and ordinarily require no further analysis. Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets post-merger potentially ra ise significant competitive concerns, depending on the factors set forth in Sections 2-5 of the Guidelines. Where the post-merger HHI exceeds 1800, it will be presumed that mergers producing an increase in the HHI of more than100 points are likely to create or enhance market power or facilitate its exercise. The presumption may be overcome by a showing that factors set forth in Sections 2-5 of the Guidelines make itunlikely that the merger will cr eate or enhance market power or facilitate its exercise, in light of ma rket concentration and market shares. http://www.justice.gov/atr/publ ic/guidelines/horiz_book/15.html

### 1.52 Factors Affecting the Significance of Market Shares and Concentratio n
The post-merger level of market concentration and th e change in concentration resulting from a merger affect the degree to which a merger raises competitive concerns. However, in some situations, market share and market concentration data may either unders tate or overstate the likely future competitive significance of a firm or firms in th e market or the impact of a merger. The following are examples of such situations.


### 1.521 Changing Market Conditions

Market concentration and market share data of necessi ty are based on historical evidence. However, recent or ongoing changes in the market may indicate that the current market share of a particular firm either understates or overstates the firm's future competitiv e significance. For example, if a new technology that is important to long-term competitive viability is available to other firms in the market, but is not available to a particular firm, the Agency may conclude that th e historical market share of that firm overstates its future competitive significance. Th e Agency will consider reasonably predictable effects of recent or ongoing changes in market conditions in interpreti ng market concentration and market share data.


### 1.522 Degree of Difference Between the Pr oducts and Locations in the Market and Substitutes Outside the Market

All else equal, the magnitude of potential competitive harm from a merger is greater if a hypothetical monopolist would raise price within the relevant market by substantially mo re than a "small but significant and nontransitory" amount. This may occur when the de mand substitutes outside th e relevant market, as a group, are not close substitutes for the products and locations within the relevant market. There thus may be a wide gap in the chain of demand substitutes at the edge of the product and geographic market. Under such circumstances, more market power is at stake in the relevant mark et than in a market in which a hypothetical monopolist would raise price by exactly five percent.

17For example, a market consisting of four firms with market shares of 30 percent, 30 percent, 20 percent and 20 percent has an HHI of 2600 (30 2 + 30 2 + 20 2 + 20 2 = 2600). The HHI ranges from l0,000 (in the case of a pure monopoly) to a number a pproaching zero (in the case of an atomistic market). Although it is desirable to include all firms in th e calculation, lack of information about small firms is not critical because such firms do not affect the HHI significantly.

18 The increase in concentration as measured by the HH I can be calculated independently of the overall market concentration by doubling the product of the market shares of the merging firms. For example, the merger of firms with shares of 5 percent and 10 per cent of the market would increase the HHI by l00 (5 x l0 x 2 = l00). The explanation for this technique is as follows: In calculating the HHI before the merger, the market shares of the merging firms are squared individually: (a) 2 + (b) 2 . After the merger, the sum of those shares would be squared: (a + b) 2 , which equals a2 + 2ab + b 2. The increase in the HHI therefore is represented by 2ab. http://www.justice.gov/atr/publ ic/guidelines/horiz_book/15.html

# Horizontal Merger Guidelines

U.S. Department of Justice a nd the Federal Trade Commission

Issued: April 2, 1992 Revised: April 8, 1997

Note: Section 4 of these Guidelines , relating to Efficiencies, appears as it was issued in revised form by the Department of Justice and the Federal Trade Commission on April 8, 1997; and the footnotes in Section 5 of the Guidelines have been renumbered accordingly. The remaining portions of the Guidelines were unchanged in 1997, and appear as they were issued on April 2, 1992.



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