New merger guidelines have a concentration problem

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The new draft merger guidelines from the FTC and the Justice Department have sparked a lot of commentary. Over at National Review’s Capital Matters site, Alex Reinauer and I explore an overlooked flaw in the guidelines: their use of the Herfindahl-Hirschman Index (HHI) to calculate market concentration.

This gives out a market concentration score based on how many companies are in the relevant market, and each one’s market share. This sounds reasonable, but in practice isn’t:

Worse, regulators can define “relevant markets” any way they want to, which means they can get almost any HHI score they want. Computer scientists call this a garbage-in, garbage-out problem, and it is an example of what’s called the relevant-market fallacy. It is fatal to the index’s integrity.

HHI might sound fancy because it uses math, but it is so easily politicized that it is analytically useless. Regulators can and should abandon it altogether.

Read the whole piece here. I previously discussed HHI’s fatal flaws here. CEI’s Eye on FTC website is here.