The Efficiency Gains From Mergers - by Nicholas Decker
Homo Economicus
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The Efficiency Gains From Mergers<br>And should we care about the level of market concentration?
Nicholas Decker<br>Apr 27, 2026
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Whenever a merger is proposed, if the deal size is above the threshold set out in the Hart-Scott-Rodino Act of 1976, the deal must be reported to the FTC and the Department of Justice, who have thirty days to act. There are too many mergers each year for the United States government to review each one – some 14,000 a year – so they must be quickly triaged. The first step of the FTC and DOJ on evaluating a merger is to consider market concentration. If the change in concentration is sufficiently large, or the market is already considerably concentrated, the agency is much more likely to challenge the merger. If they do, they can subpoena documents – notionally, they have another 30 days to do this, but the agencies will exchange time to review for less complete data disclosure. Very few mergers are challenged, although the expense (which comes largely from the acquired firm hanging in limbo for a time, unable to invest as they would like) surely dissuades many obviously bad combinations from occurring.<br>Included below are the thresholds which trigger more intensive review. HHI, or the Herfindahl-Hirschman Index, is the sum of squared market shares, out of 10,000 because we are squaring the percentages. Four firms controlling 40, 30, 20, and 10 percent of the market would give you an HHI of 3,000, which is a highly concentrated market. Neatly enough, if you are willing to assume firms with constant marginal costs competing on quantity, then the Lerner index (price minus marginal cost, all divided by price) is equal to HHI over the elasticity of demand.
The antitrust authority is balancing two competing interests. On the one hand, we would not like firms to monopolize a market, reducing total welfare. It is worth noting that, under any mode of competition where firms are earnestly competing with each other, an increase in concentration must increase market power. (Why do I specify that the firms are earnestly competing with each other? Because if they are in collusion, then the sustainability of the agreement is determined both by the number of parties to the agreement, and also by the symmetry of the firms in it. It is possible for mergers to destabilize a collusive cartel – see Igami and Sugaya (2021) for more.) If there are several firms in the market engaged in Cournot competition – such that they set the quantity they would like to produce first, and then choose the price – the markup is equal to 1 over n, where n is the number of firms and 1 is the markup which could be obtained by a monopolist.
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On the other hand, we would not like to encumber advantageous combinations of firms. Firms buy each other for a reason – indeed, there is some reasonable argument that a merger must have efficiencies because otherwise the two firms would not agree to it. They would prefer to continue receiving 2n profits, rather than the profits one firm can attain with one fewer firm. This says nothing, admittedly, about consumer welfare, and breaks the moment we move away from homogenous product Cournot to differentiated product Bertrand.<br>The law is in a strange state, because it really does push you to the interpretation that no merger, no matter how efficient, can be allowed if it should increase market power. Once a case makes it to trial, efficiencies are no defense. The decision not to challenge is a pragmatic recognition that obviously, preventing any firm from buying another would be absolutely insane.<br>All this is leading up to a paper I read recently by Nocke and Whinston, who argue that the initial screens used by the FTC are ill-conceived. Remember that the FTC cares about both the level, and the change. Nocke and Whinston argue that this doesn’t make sense – there is simply no role for the level in assessing the anti-competitive effects. In any of the standard models they consider, the level is simply irrelevant to the merger, at least when we are considering the unilateral ability of a firm to affect its own profits. (Things are different if fewer firms are more able to engage in collusion).<br>This is in line with something that antitrust economists have been hollering about for a while, which is that you cannot simply regress HHI on price and expect it to mean anything. Any observed level of concentration can be consistent with any level of markups, depending upon the particular cost and demand conditions in that market. It’s only once we hold fixed the costs – and hence, only care about the change – that concentration can map onto something meaningful.<br>Nocke and Whinston then go on to ask – “wait a second, why are these thresholds set where they are?”. The answer is pragmatism – they were written in 1982 without reference to theory, and then revised in 2010 to bring into line...