The Price-Concentration Hypothesis and Horizontal Merger Policy

This chapter addresses a fundamental question in the antitrust law of horizontal mergers. Namely, does an increase in seller concentration increase the price in a market? The question and its affirmative answer constitute the price-concentration hypothesis. First, the chapter places the hypothesis in the context of horizontal merger policy, explaining that the role of seller concentration in antitrust merger policy has evolved from the Supreme Court’s decisions in early cases under Section 7 of the Clayton Act as amended by the Celler-Kefauver Act to the enforcement agencies’ current applications of the Horizontal Merger Guidelines. Second, the chapter reviews the theory underlying the hypothesis and states the predictions of the theory. Third, the chapter reviews the empirical evidence on the hypothesis, identifying the range of that work but focusing on a subset of it for use in the fourth task. For that fourth task, the theory and the evidence are used to address the antitrust policy question of whether a significant increase in market share through a merger in a concentrated industry is enough to presume that the merger is likely to lessen competition substantially (the Philadelphia National Bank presumption), and if so, what should be the evidentiary * I thank Wayne Dale Collins, Stephen Martin, and Lawrence J. White for helpful discussion and comments. The Price-Concentration Hypothesis, JTS, version 032406 2 threshold for rebutting that presumption. The conclusion regarding the answer to that two-part policy question is: yes, and the Guidelines’ Hirschman-Herfindahl Index (HHI) thresholds for concern are supported by the evidence; yet while the logic of the Guidelines’ approach to the evidentiary requirements for rebuttal of the presumption is well-grounded in theory, in practice there is reason to believe that the threshold for rebuttal should be higher than the threshold implied by current enforcement practice.