An Alternative to HHI?

Posted by D. Daniel Sokol

In my comparative and international antitrust class, we just got through two classes on comparative merger issues.  The second class focused more heavily on issues of how different jurisdictions think about market definition questions.  I was very impressed with my students' ability to engage in very difficult conceptual issues.  This coming week we shift gears to questions of monopolization and will be very fortunate to have Microsoft Deputy GC Tom Burt address our class on comparative Microsoft cases.

On the issue of market power, Jerry Hausman of MIT's economics department and Greg Sidak of Georgetown Law School have just posted a paper that is worth reading entitled Evaluating Market Power Using Competitive Benchmark Prices Rather than the Hirschman-Herfindahl Index.

Abstract: Whenever feasible, market power determinations should rest on competitive benchmark prices rather than the typical market concentration approach. Government regulators in many countries have issued guidelines on the evaluation of market power in the merger context and other areas that define relevant markets and calculate market shares—along with a summary measure of market concentration, usually the Hirschman-Herfindahl index (HHI). However, competition authorities recognize that high concentration measures are generally not a sufficient condition to infer market power. Use of other structural factors in a market often does not lead to any clearer conclusion. We show that prices that consumers pay for the product in question often offer a superior quantitative measurement that leads to a clearer conclusion than the HHI approach. Further, because prices form the basis for the evaluation of consumer welfare (consumers surplus), they also provide important information for competition authorities, whose goal is typically the protection of consumer welfare. To demonstrate our argument, we examine a decision by the Irish telecommunications regulator, ComReg, which used the EU competition guidelines and the HHI approach to determine that Ireland's two largest mobile providers, Vodafone and O2, had joint dominance and were exercising significant market power. We demonstrate how our benchmark prices approach is superior to the HHI approach.