Page 45 - FINAL CFA II SLIDES JUNE 2019 DAY 6
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LOS 25.g: Calculate and interpret the Herfindahl–Hirschman
Index and evaluate the likelihood of an antitrust challenge READING 25: MERGERS AND ACQUISITIONS
for a given business combination.
HHI replaced market share as the key measure of market power for MODULE 25.1: MERGER MOTIVATIONS
determining potential antitrust violations. It is the sum of the squared market
shares for all firms within an industry.
HHI < 1,000: Industry is competitive and unlikely antitrust challenge.
1000 < HHI < 1,800 Industry is moderately concentrated. Regulators will compare the pre-merger and post-merger HHI. If the
change > 100 points, the merger is likely to be challenged on antitrust grounds.
HHI > 1,800 A highly concentrated industry. Regulators will again compare, and if HHI change > 50,
the merger is likely to be challenged.
EXAMPLE: HHI in a competitive market: Suppose
that there are 20 firms in the industry, each with a 5%
market share. Also imagine that firms 19 and 20
decide to merge. Calculate the pre-merger and
post-merger HHI and discuss the likelihood of an
antitrust challenge of the merger.
EXAMPLE: HHI in a concentrated market: Imagine that there are five firms in the
industry, each with a 20% market share. Also suppose that firms 4 and 5 decide to
merge. Calculate the pre-merger and post-merger HHI and discuss the likelihood of an
antitrust challenge!
No the change between the two values: Why?
Change in HHI = 800 > 50! Meaning?
Antitrust challenge is virtually certain.
