Key Concepts and Summary

Key Concepts and Summary

A corporate merger involves two private firms joining together. An acquisition refers to one firm buying another firm. In either case, two formerly independent firms become one firm. Antitrust laws seek to ensure active competition in markets, sometimes by preventing large firms from forming through mergers and acquisitions, sometimes by regulating business practices that might restrict competition, and sometimes by breaking up large firms into smaller competitors.

A four-firm concentration ratio is one way of measuring the extent of competition in a market. It is calculated by adding the market shares—that is, the percentage of total sales—of the four largest firms in the market. A Herfindahl-Hirschman Index (HHI) is another way of measuring the extent of competition in a market. It is calculated by taking the market shares of all firms in the market, squaring them, and then summing the total.

The forces of globalization and new communications and information technology have increased the level of competition faced by many firms by increasing the amount of competition from other regions and countries.

Glossary

acquisition

when one firm purchases another

antitrust laws

laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones

concentration ratio

an early tool to measure the degree of monopoly power in an industry; measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms

four-firm concentration ratio

the percentage of the total sales in the industry that are accounted for by the largest four firms

Herfindahl-Hirschman Index (HHI)

approach to measuring market concentration by adding the square of the market share of each firm in the industry

market share

the percentage of total sales in the market

merger

when two formerly separate firms combine to become a single firm