[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Wrap-Up
ANTITRUST POLICIES
Antitrust policies are designed to ensure competition in the marketplace by
Limiting market dominance
Curbing restrictive trade practices
The problems faced in designing and enforcing antitrust policies include
The problem of defining the market
Determining how to deal with firm practices that may both reduce competition
and enhance efficiency
Enforcement of antitrust regulations can involve criminal or civil penalties.
Case in Point
COKE AND PEPSI PLAY MERGER
The Coca-Cola Company and PepsiCo, Inc., dominate the market for carbonated
soft drinks. Early in 1986, each proposed to grow larger through acquisition. In
January, PepsiCo proposed buying 7-Up, the fourth-largest soft drink manufacturer,
for $380 million. In February, Coca-Cola proposed buying Dr. Pepper, the thirdlargest,
for $470 million.
The mergers would have made the big even bigger. Coca-Cola and PepsiCo already
held 39 percent and 28 percent of the market, respectively, while Dr. Pepper had
7 percent and 7-Up had 6 percent. The next largest firm in the market after 7-Up
was R. J. Reynolds (known for Canada Dry and Sunkist), which held 5 percent of
the soft drink market.
The Federal Trade Commission announced that it would oppose the mergers.
To assess the impact on competition in such cases, the government often uses what
is called the Herfindahl-Hirschman index (HHI). The HHI is calculated by summing
the squares of the market shares. If the industry consists of a single firm, then the
HHI is (100) 2 = 10,000. If the industry consists of 1,000 firms, each with 0.1 percent
of the market, then the HHI is (0.1) 2 × 1,000 = 10. Thus, higher values of the HHI
indicate less competitive industries.
Merger guidelines used by the federal government divide markets into three
categories, with different policy recommendations. The divisions and policy
recommendations are given in Table 13.2.
Before the mergers, assuming that the 15 percent of the market not accounted
for by the big five was divided equally among fifteen small producers, a somewhat
simplified HHI for the soft drink industry was
HHI = 39 2 + 28 2 + 7 2 + 6 2 + 5 2 + 15 (1) 2 = 2,430.
306 ∂ CHAPTER 13 GOVERNMENT POLICIES TOWARD COMPETITION