What is the Herfindahl-Hirschman Index (HHI) and how is it calculated? What woul

Question

What is the Herfindahl-Hirschman Index (HHI) and how is it calculated? What would the index be for a perfect monopoly compared to a market with 5 providers, each with a 20% market share? According to the Justice Department Guidelines, what are the new guidelines under the current administration that deem an industry to be concentrated and how much is the index 'allowed' to increase as the result of a merger? With respect to the proposed merger between AT&T; and T-Mobile how much will the index increase in local and national markets? How does the Justice Department describe T-Mobile's competitive role in the marketplace and why would they deem this to be important?

Explanation / Answer

Herfindahl index:-

The Herfindahl index (also known as Herfindahl–Hirschman Index, or HHI) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust[1] and also technology management.[2] It is defined as the sum of the squares of the market shares of the firms within the industry (sometimes limited to the 50 largest firms),[3] where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer. Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Alternatively, if whole percentages are used, the index ranges from 0 to 10,000 "points". For example, an index of .25 is the same as 2,500 points.

The major benefit of the Herfindahl index in relationship to such measures as the concentration ratio is that it gives more weight to larger firms.

Calculation & Example:

Let's say there are four grocery stores in your town: Albert's, Bob's, Carl's and Donald's. Market share is broken down as follows:

Albert's:   50%
Bob's:      25%
Carl's:      15%
Donald's: 10%

HHI = 502 + 252 + 152 + 102 = 3,450

In a perfectly competitive market, HHI approaches zero. Let's say there are thousands of restaurants in your city, but the top 50 each have 0.1% of the market share. The HHI is 0.12 x 50 = 0.5.

In a monopoly, HHI approaches 10,000. If the one largest firm has 100% of the market share, HHI = 1002 = 10,000.

Monopoly:-

Degree of monopoly power = P – MC/P

Where P denotes price and MC denotes marginal cost at the equilibrium level of output.

When competition is pure or perfect, price (P) is equal to marginal cost and therefore Lerner’s index of monopoly power is equal to zero indicating no monopoly power at all, for when price is equal to marginal cost, P – MC will be equal to zero and the above formula will yield the value of index as zero.

Thus, under perfect competition, Lerner’s index of monopoly power = (P – MC/P) = 0/P = 0. On the other hand, when the monopolised product entails no cost of production, that is, when the product is a free good whose supply is controlled by one person, the marginal cost will be equal to zero and Lerner’s index of monopoly power (P-MC/P) would be equal to one or unity. Thus when MC is equal to zero P – MC/P = P – 0/P = P/P = 1

It is thus clear that Lerner’s index of monopoly power can vary from zero to unity. Within this range, the greater the value of the index (P – MC/P) the greater the degree of monopoly power possessed by the seller. For instance, if the price of a product is equal to Rs. 15 per unit and its marginal cost is Rs. 10, then the value of index of monopoly power will be 15 – 10/15 = 5/15 = 1/3 and when the price is equal to Rs. 20 and marginal cost is equal to 10, the index of monopoly power will be equal to 20 – 10/20 = 10/20 = 1/2.

So it willbe Equal

New guidelines:-

WASHINGTON—Attorney General Eric Holder on Monday laid out new guidelines against racial and other types of profiling, citing law-enforcement cases that have sparked protests even as the new federal policy wouldn’t affect local police.

The federal government since 2003 has banned profiling on the basis of race or ethnicity, though it has made an exception for national-security investigations. The new policy also will bar profiling on the basis of religion, gender, national origin, sexual orientation or gender identity, according to officials.

But the new policy won’t apply to screening at borders and airports, where Department of Homeland Security personnel have long given extra scrutiny to people from certain countries.

The policy also doesn’t apply to local or state law enforcement, beyond those personnel assigned to federal task forces. Because of that, the rules don’t speak to the cases involving Michael Brown, who was shot and killed by a Ferguson, Mo., police officer, andEric Garner, who died after being put in an apparent police choke hold in New York City. Grand juries in those cases declined to indict the police officers, both white, in the deaths of the men, both black and unarmed, which have stirred demonstrations and spurred calls for a re-examining of the relationship between law enforcement and their communities.

Concerns about racial profiling on the part of civil-liberties groups mostly have to do with traffic stops and pat-downs of pedestrians. Because federal law-enforcement agents rarely engage in those activities, barring them from profiling may have little impact on how and why people are stopped in their everyday lives.

Still, Mr. Holder cited the recent cases as a reason for the new policy, and he said he would encourage local authorities to adopt the same guidelines. “Particularly in light of certain recent incidents we’ve seen at the local level and the widespread concerns about trust in the criminal justice process…it’s imperative that we take every possible action to institute strong and sound policing practices,” he said.

Rajdeep Singh of the Sikh Coalition, a group that advocates against racial profiling of travelers, said that because the new policy won’t apply to much of the work done at the border and at airports, it gives “a green light to profile ethnic and religious minorities at the border, and continues to give [the Transportation Security Administration] carte blanche authority to profile travelers based on stereotypes.”

Mr. Holder, who has announced he will leave his post as attorney general as soon as a successor is confirmed, hailed the new policy as “a major and important step forward to ensure effective policing by federal law-enforcement officials.”

Federal agencies including the Federal Bureau of Investigation and Drug Enforcement Administration have long said racial profiling isn’t part of their law-enforcement work. In internal discussions about the policy, the FBI has resisted efforts to restrict considerations of religion and national origin or ethnicity in counterterrorism investigations, because those things may be relevant factors to such an investigation, according to people familiar with the discussions.

The new policy allows federal agents to consider such factors only if there is information that links people with a particular characteristic to a specific scheme, organization or threat, and if the law-enforcement officials believe such investigation is merited under the totality of the circumstances, according to a person familiar with the new policy.

Almost three-quarters of the mergers in our
Index were between organisations with similar
geographic coverage – 52% were between local
organisations and 23% were between national
organisations. Most of the main national mergers
were motivated by a desire to expand capacity
and scale of existing services, such as homeless
charities St. Mungo’s and Broadway, or funders
Impetus Trust and the Private Equity Foundation.

Merger Index:-

Will the merger of AT&T and T-Mobile be good for mobile users?
At the time the merger was announced, Yankee Group thought the
combined spectrum made possible by such a merger could bring
better coverage and higher performance to customers (see the March
2011 Yankee Group Report “AT&T/T-Mobile to Verizon: Can You
Hear ME Now?”). However, while a single company with combined
spectrum promises better coverage, that technical solution ignores
the market effects created by such a merger. This report is intended
to raise our concern about the potential market and competitive
implications of this merger on the U.S. wireless marketplace.
Since the March announcement, Yankee Group has analyzed its
wireless industry and consumer data to understand the effects
such a merger would have on the U.S. market, consumers and
businesses. These results dash cold water on the merger’s promise
of benefiting consumers and competition; instead, we see this
merger resulting in less choice and higher prices for T-Mobile’s
consumer and business customers.
According to Yankee Group’s North America Mobile Carrier Monitor,
June 2011, AT&T and Verizon each reported having almost a third of
all U.S. subscribers at the end of March 2011 (see Exhibit 1). AT&T
reported having 97.5 million or nearly 32 percent, while Verizon
reported 95 million or just over 31 percent. Other mobile operators,
including Sprint (about 51 million subscribers), T-Mobile (33.6 million)
and other smaller carriers, offer alternative wireless services that
serve 105.4 million, or roughly the other third of the U.S.’ 298 million
subscribers. This market share picture at the national level appears to
provide consumers with a wealth of choices.

Justice Department T-mobile:-

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The United States Department of Justice has filed an antitrust complaint seeking to block the AT&T / T-Mobile merger, as first reported by Bloomberg this morning. According to Deputy Attorney General James M. Cole, "the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services." The DOJ says that T-Mobile's low prices and innovative products have been a "disruptive force" in the industry by being the first to offer BlackBerry devices, the Sidekick, Android devices, unlimited service plans, and nationwide Wi-Fi. As a result, the DOJ says that "AT&T’s elimination of T-Mobile as an independent, low- priced rival would remove a significant competitive force from the market."

The DOJ also says it seriously considered AT&T's claim that T-Mobile's spectrum would help it build out broader LTE coverage more quickly and ultimately decided that the potential impact on competition wasn't worth it. What's more, the DOJ dismissed AT&T's claims that a buyout was the only option to boost its network, saying "AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor."

AT&T General Counsel Wayne Watts says the carrier is "surprised and disappointed" by the move, and that "there was no indication from the DOJ" that it would file to block the merger. Watts also says AT&T intends to file for an expedited hearing and "vigorously contest this matter in court" -- the only real option for the carrier at this juncture, as it had previously agreed to pay T-Mobile a massive $6b fee in cash and spectrum if the merger doesn't go through. Watts also says AT&T is "confident that this merger is in the best interest of consumers and our country," and that the burden rests on the DOJ to prove any anti-competitive impact.

Update: We just received an official statement from FCC chairman Julius Genachowski -- he says that the FCC also has "serious concerns" about the merger affecting wireless competition:

By filing suit today, the Department of Justice has concluded that AT&T's acquisition of T-Mobile would substantially lessen competition in violation of the antitrust laws. Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition. Vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile. Competition fosters consumer benefits, including more choices, better service and lower prices.

That doesn't bode well for AT&T -- it's possible it'll have a two-way fight on its hands very soon. Read the DOJ's full press release after the break, as well as AT&T's statement.

Update 2: Sprint says the DOJ's action is a "decisive victory for consumers." It's also a victory for Sprint, which has been campaigning nonstop against the merger since it was first announced. We've added Sprint's full statement after the break as well.

Update 3: And now Deutsche Telekom is chiming in, which stands to receive $39b in the event the acquisition goes through. Needless to say, they're not happy, saying they're "very disappointed" with today's move and that they "appreciate the DOJ's willingness to discuss possible remedies to address the competitive concerns." See the full statement after the break.

Source: DOJ filing (PDF), Bloomberg, WSJ's Anupreeta Das (Twitter), T-Mobile

Justice Department Files Antitrust Lawsuit to Block AT&T’s Acquisition of T-Mobile

Transaction Would Reduce Competition in Mobile Wireless Telecommunications Services, Resulting in Higher Prices, Poorer Quality Services, Fewer Choices and Fewer Innovative Products for Millions of American Consumers

WASHINGTON – The Department of Justice today filed a civil antitrust lawsuit to block AT&T Inc.’s proposed acquisition of T-Mobile USA Inc.   The department said that the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.

The department’s lawsuit, filed in U.S. District Court for the District of Columbia, seeks to prevent AT&T from acquiring T-Mobile from Deutsche Telekom AG.

"The combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services," said Deputy Attorney General James M. Cole.   "Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation’s wireless carriers, particularly the four remaining national carriers.   This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition."

"T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network," said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division.   "Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer."

Mobile wireless telecommunications services play a critical role in the way Americans live and work, with more than 300 million feature phones, smart phones, data cards, tablets and other mobile wireless devices in service today.   Four nationwide providers of these services – AT&T, T-Mobile, Sprint and Verizon – account for more than 90 percent of mobile wireless connections.   The proposed acquisition would combine two of those four, eliminating from the market T-Mobile, a firm that historically has been a value provider, offering particularly aggressive pricing.

According to the complaint, AT&T and T-Mobile compete head to head nationwide, including in 97 of the nation’s largest 100 cellular marketing areas.   They also compete nationwide to attract business and government customers. AT&T’s acquisition of T-Mobile would eliminate a company that has been a disruptive force through low pricing and innovation by competing aggressively in the mobile wireless telecommunications services marketplace.

The complaint cites a T-Mobile document in which T-Mobile explains that it has been responsible for a number of significant "firsts" in the U.S. mobile wireless industry, including the first handset using the Android operating system, Blackberry wireless email, the Sidekick, national Wi-Fi "hotspot" access, and a variety of unlimited service plans.   T-Mobile was also the first company to roll out a nationwide high-speed data network based on advanced HSPA+ (High-Speed Packet Access) technology. The complaint states that by January 2011, an AT&T employee was observing that "[T-Mobile] was first to have HSPA+ devices in their portfolio…we added them in reaction to potential loss of speed claims."

The complaint details other ways that AT&T felt competitive pressure from T-Mobile.   The complaint quotes T-Mobile documents describing the company’s important role in the market:

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