When analyzing a proposed merger of two large companies, what must the government carefully consider?

• A. The personal relationship between the CEOs of the merging companies
• B. The impact of the merger on market concentration, as measured by the Herfindahl-Hirschman Index (HHI)
• C. The number of employees who will receive promotions after the merger
• D. The color schemes of the companies' logos

Answer: (B)

Verified step by step guidance

1. Understand that when the government analyzes a proposed merger, its primary concern is the effect on market competition, not unrelated factors like personal relationships or branding.
2. Recognize that market concentration is a key indicator of how competitive a market is, and mergers can increase concentration by reducing the number of independent firms.
3. Learn about the Herfindahl-Hirschman Index (HHI), which is a common measure of market concentration calculated by summing the squares of the market shares of all firms in the market.
4. To assess the merger's impact, calculate the HHI before and after the merger by squaring the market shares of each firm and summing them, then compare the change in HHI.
5. A significant increase in the HHI after the merger suggests reduced competition, which may lead the government to scrutinize or block the merger to protect consumer welfare.