On the Misuse of Regressions of Price on the HHI in Merger Review

Economists widely agree that, absent sufficient efficiencies or other offsetting factors, mergers that increase concentration substantially are likely to be anticompetitive. Further, holding everything else equal, the magnitude of anticompetitive effects tends to be larger, the larger is the increase in concentration caused by the merger. As market concentration is more easily measured than the post-merger equilibrium (which is unobserved ex ante), the use of concentration screens in the antitrust review of mergers is sensible and economically well-founded. It might seem natural to determine whether prices are positively related to measures of concentration, such as the Herfindahl-Hirschman Index (HHI), comparing across different geographic markets or time periods. This might be implemented by using a simple regression of price on the HHI. However, for reasons that we describe, regressions of price on the HHI should not be interpreted as establishing causation. That is, they do not inform how a change in concentration from a merger would affect prices. Courts and other policy-makers should not rely on regressions of price on the HHI for the purposes of antitrust merger review