The energy drink industry is dominated by 4 firms, Reb Bull, Monster, Amster and

Question

The energy drink industry is dominated by 4 firms, Reb Bull, Monster, Amster and Sobe. Their respective market shares are 70%, 6%, 5% and 4% respectively. The US Health department has recently released the negative effects of energy drinks and some changes in this industry are expected. What do you think the Department of Justice would say if Amster and Sobe want's to merge?

We do not accept the proposed merge because the HHI will increase in more than 200 points

We have to scrutinize this merge proposal because the HHI will increase more than 100 points but less than 200

We accept the proposed merge because the HHI will increase in less than 100 points

We do not accept the proposed merge because the industry is highly concentrated

We do not accept the proposed merge because the HHI will increase in more than 200 points

We have to scrutinize this merge proposal because the HHI will increase more than 100 points but less than 200

We accept the proposed merge because the HHI will increase in less than 100 points

We do not accept the proposed merge because the industry is highly concentrated

Explanation / Answer

Since 1982, the U.S. Department of Justice, the Federal Trade Commission, and state attorneys general have used the Herfindahl-Hirschman Index (HHI) to measure market concentration for purposes of antitrust enforcement. The HHI of a market is calculated by summing the squares of the percentage market shares held by the respective firms. For example, an industry consisting of two firms with market shares of 70% and 30% has an HHI of 70²+30², or 5800.

According to the DOJ-FTC 2010 Horizontal Merger Guidelines, the agencies will regard a market in which the post-merger HHI is below 1500 as "unconcentrated," between 1500 and 2500 as "moderately concentrated," and above 2500 as "highly concentrated." A merger potentially raises "significant competitive concerns" if it produces an increase in the HHI of more than 100 points in a moderately concentrated market or between 100 and 200 points in a highly concentrated market. A merger is presumed "likely to enhance market power" if it produces an increase in the HHI of more than 200 points in a highly concentrated market.

Since the HHI is 41 even post merger in this concentrated market and will not increase market power, the Department of Justice would say

We do not accept the proposed merge because the industry is highly concentrated.

Since 1982, the U.S. Department of Justice, the Federal Trade Commission, and state attorneys general have used the Herfindahl-Hirschman Index (HHI) to measure market concentration for purposes of antitrust enforcement. The HHI of a market is calculated by summing the squares of the percentage market shares held by the respective firms. For example, an industry consisting of two firms with market shares of 70% and 30% has an HHI of 70²+30², or 5800.

According to the DOJ-FTC 2010 Horizontal Merger Guidelines, the agencies will regard a market in which the post-merger HHI is below 1500 as "unconcentrated," between 1500 and 2500 as "moderately concentrated," and above 2500 as "highly concentrated." A merger potentially raises "significant competitive concerns" if it produces an increase in the HHI of more than 100 points in a moderately concentrated market or between 100 and 200 points in a highly concentrated market. A merger is presumed "likely to enhance market power" if it produces an increase in the HHI of more than 200 points in a highly concentrated market.

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