Concentration Thresholds for Horizontal Mergers

Concentration-based thresholds for horizontal mergers, such as those in the US Horizontal Merger Guidelines, play a central role in merger analysis but their basis remains unclear. We show that there is both a theoretical and an empirical basis for focusing solely on the change in concentration, and ignoring its level, in screening mergers for whether their unilateral price effects will harm consumers. We also argue that current threshold levels likely are too lax, unless one expects efficiency gains of 5 percent or greater, or other factors such as entry and product repositioning to significantly constrain the exercise of market power postmerger. (JEL D43, G34, G38, K21, L13, L41)

Automated summary

This study finds both theoretical and empirical basis for focusing solely on the change in concentration, and ignoring its level, in screening mergers for whether their unilateral price effects will harm consumers. The current threshold levels are likely too lax, unless there are significant efficiency gains or factors like entry and product repositioning to constrain market power postmerger.