Antitrust a Common Reason for Antitrust Investigation Essay

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Antitrust

A common reason for antitrust investigation is with mergers and acquisitions. The Department of Justice must approve proposed mergers, to ensure that the merger or acquisition activity does not unduly restrain competition in an industry or market. One recent example of antitrust investigation came with the bids by Dollar General and Dollar Tree to acquire Family Dollar. The concern was that post-merger, the combined entity would be able to constrain competition and by virtue of that raise prices, in a market whose customers depend on access to those low prices (Heneghan, 2015).

Antitrust behavior comes with it costs to the economy. The underlying principle of antitrust legislation is that when there is insufficient competition in a market, the participants in that market have the ability to exploit that lack of competition, and raise their prices to a level that would not occur if the market was competitive (Investopedia, 2015). The government regulates industry so that firms cannot engage in antitrust behavior. In mergers and acquisitions, when one of these is proposed, the government will evaluate the impact that the merger -- if it goes through -- would have on competition. The level of competition is sometimes evaluated with the Herfindahl-Hirschman Index, which provides a mathematical formula of market share that defined whether a merger constitutes antitrust behavior or not. The government has this power as the result of the Sherman Act, which created the regulatory body and set out the rules for enforcing against antitrust behavior.

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When the HHI reaches a certain threshold, the industry is said to be in oligopoly condition, and the government will not approve a merger than results in oligopoly. This is the situation with the dollar stores, because the government has defined this industry as a dollar store industry, and sees that there are three major players. If one of these bought another, there would only be two, and the larger would have a significant majority share of the market. As a result, the industry would be an oligopoly and lack sufficient competition.

That said, there are different ways to define an industry. If the industry is defined as dollar stores, the proposed acquisition would not go through, because it would create oligopoly conditions. If the industry is defined as general retail, there are many other players in this industry. The market shares of these dollars stores would be insignificant in a business with….....

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