Unformatted text preview: 0000) N
HHI = 10000 × ∑ N
i =1 ∑ Ri i =1 2 ÷
÷ 7 What affects unilateral market power?
• Look at concentration indices, e.g.
1st: Look at LEVEL
2nd: Look at Change of HHI
• • •
• US Merger Guidelines: If the post merger HHI is
lower than 1,000 (low concentration), merger will
If HHI between 1000 and 1800, merger is
approved as long as HHI does not increase more
than 100 points due to merger.
If HHI > 1800, merger is not challenged, only if HHI
does not increase by more than 50 points.
OTHERWISE: merger case will be investigated in
8 Problems with Herfindahl Index It
It does not necessarily capture the actual
competition in the market
Consider a duopoly: We know that a Cournot
equilibrium will result in a higher price than the
Bertrand equilibrium ( = price equals marginal cost)
Bertrand Thus, Bertrand market is much more competitive than
a Cournot market
Cournot However, the HHI would be misleading in this case as
it would equal 0.5 in both cases
In both cases, firms share the market equally, and HHI takes
the lowest possible value 1/N ( = no concentration) = 0.5 in
the duopoly case.
the HHI = 0.52 + 0.52 = 0.5
9 Problems with Herfindahl Index Often the Herfindahl Index is not based on the relevant
market of a company
market Example from Germany: There is only one producer of motor
cycles in Germany BMW.
The official Herfindahl Index for the German motor cycle industry
is equal to 1 (or 10000)
However, we know that BMW has certainly no monopoly. The
market is competitive as there are many foreign brands of motor
Standard HHI typically accounts only for domestic production. In
times of globalization this is very misleading. HHI biased
10 Problems with Herfindahl Index Furthermore, a firm has to be classified into a single
industry. Usually done by product sales in main marke...
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- Spring '13
- Economics, HHI