Horizontal Mergers, Industry Structure, and the Market Concentration Doctrine

This paper presents a large-sample, value-based test of the proposition that a horizontal merger is more likely to have anticompetitive effects the higher the level of and change in industry concentration. The theoretical basis for this proposition is the controversial Market Concentration Doctrine which holds that industry concentration is a reliable index of market power. Our empirical analysis represents an extension of the methodology developed by Eckbo (1983) and differs from the traditional "structuralist" approach to this issue. Specifically, we study the cross-sectional relationship between the estimated industry wealth effect of successful merger and acquisition announcements and industry specific variables, including 4-firm concentration levels and change in the industry's Herfindahl Index. Our sample consists of 232 horizontal and a control-group of 158 non-horizontal large mergers and acquisitions in more than 180 different 4-digit mining and manufacturing industries between 1963 and 1981. One hundred of these mergers were challenged by the U.S. Department of Justice or the Federal Trade Commission with violating the anti-monopoly provisions of Section 7 of the Clayton Act, the principal federal antitrust law governing corporate acquisitions. The bulk of the evidence contradicts the prediction of the Market Concentration Doctrine and indicates that these mergers increased industry concentration by providing an efficient reallocation of corporate resources