Concentration and Geographic Proximity in Antitrust Policy: Evidence from Bank Mergers

Abstract

Antitrust often uses the Herfindahl-Hirschman Index (HHI) for merger screening and review. We argue that HHI-based antitrust policy using predefined markets in the banking industry misses anticompetitive effects that are predicted by the proximity of merging branch networks. Difference-in-differences estimates from thousands of mergers reveal that close-proximity bank acquisitions have harmful effects, including branch closures, even if they fall below the HHI threshold for enforcement. Neither lowering the threshold nor using narrower predefined markets addresses this underenforcement without introducing significant overenforcement and underenforcement of other transactions. However, using a proximity threshold to complement the HHI policy could improve bank antitrust. (JEL G21, G28, G34, K21, L13, L41)