When Bigger Is Better: A Critique of the Herfindahl-Hirschman Index’s Use to Evaluate Mergers in Network Industries

Abstract

This Article argues that the current framework used by the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) to evaluate mergers is inadequate in that it fails to account for network benefits. In particular, I argue for abandoning the use of the HHI in analyzing network industry mergers because the index generates little useful information about these mergers’ effect on consumer welfare. Part II describes the HHI’s historical and theoretical underpinnings and its integration into the current Merger Guidelines. Part III considers general objections to the HHI before turning to its problems in evaluating network industries. Part IV presents a formal model for evaluating the effects of mergers in network industries. Part V proposes an alternative framework for merger analysis to account for network effects. Part VI concludes.