Concentration-Based Inference for Evaluating Horizontal Mergers

TL;DR

This paper develops a theoretical framework linking market concentration changes, measured by HHI, to consumer welfare impacts of mergers, providing a quantitative tool for antitrust evaluations.

Contribution

It derives a first-order approximation relating welfare effects to HHI changes using logit and CES demand models, incorporating market and share distribution factors.

Findings

Merger harm correlates with HHI change.

The proportionality depends on price responsiveness and market shares.

Numerical validation supports the theoretical formula.

Abstract

Antitrust authorities routinely rely on market concentration measures to assess the potential adverse effects of mergers on consumer welfare. Using a first-order approximation argument with logit and CES demand, I derive the relationship between the welfare effect of a merger on consumer surplus and the change in the Herfindahl-Hirschman Index (HHI). My results suggest that merger harm is correlated with the merger-induced change in HHI, and the proportionality coefficient depends on the price responsiveness parameter, market size, and the distribution of market shares within and across the merging firms. I present numerical validation of my formula along with an empirical illustration.