Abstract
The new merger guidelines, issued on June 14, 1982, by the Department of Justice, shift from using the familiar four-firm concentration ratio to the unfamiliar Herfindahl-Hirschman Index (HHI) as a measure or index of market structure. This article explains and interprets HHI, to improve its understanding by members of the antitrust bar. Successive sections:
1. define HHI as the summed, squared market shares of individual firms in the market in percentage form, with an explicit link to the dispersion or variability in the individual market shares and to the number of firms in the market, and with hypothetical examples;
2. interpret HHI as (a) a weighted average of the individual market shares, (b) the numbers equivalent, and (c) one member of a family of related structural indices;
3. give an example of the HHI calculation based on the sales stipulation in the 1975 Gypsum case;
4. discuss the theoretical and empirical bases for HHI, in comparison with other structural measures; and
5. compare CR4 (and its changes) in the 1968 Guidelines with HHI (and its changes) in the 1982 Guidelines for horizontal mergers.
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