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What is Herfindahl-Hirschman Index (HHI)?
The Herfindahl-Hirschman Index (HHI) is a measure of market concentration used to evaluate the competitiveness of an industry. Regulators and economists use it to assess how much control firms have over a market and to identify monopolistic tendencies.
Definition
The Herfindahl-Hirschman Index is a numerical measure of market concentration, calculated by squaring the market share of each firm in an industry and summing the results.
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Key Takeaways
- Indicates market competitiveness and potential monopolistic behavior.
- Used extensively in antitrust reviews and merger evaluations.
- Higher HHI = more concentrated (less competitive) market.
Understanding Herfindahl-Hirschman Index (HHI)
The HHI is calculated by taking the market share percentage of each firm, squaring it, and adding the totals. It ranges from 0 to 10,000:
- 0–1,500: Competitive market
- 1,500–2,500: Moderately concentrated
- 2,500+: Highly concentrated
Competition authorities such as the U.S. Department of Justice and the European Commission use HHI levels to determine whether a merger is likely to reduce competition.
By analyzing HHI trends, economists can identify market dominance, potential collusion, and the health of competitive dynamics.
Real-World Example
If an industry has four firms with market shares of 40%, 30%, 20%, and 10%, the HHI is:
40² + 30² + 20² + 10² = 3,000, indicating a highly concentrated market.
Importance in Business or Economics
HHI is critical for:
- Merger and acquisition analysis
- Competition policy enforcement
- Market structure evaluation
- Detecting monopolistic or oligopolistic behavior
Formula (If Applicable)
HHI = Σ (Market Shareᵢ)²
Where Market Shareᵢ is expressed as a percentage.
Types or Variations
- Pre-Merger HHI — Market concentration before merger.
- Post-Merger HHI — Market concentration after merger.
- HHI Change (ΔHHI) — Used to assess merger impact.
Related Terms
- Market Concentration
- Monopoly
- Antitrust Regulation
Sources and Further Reading
- U.S. Department of Justice Antitrust Division: https://www.justice.gov/atr
- OECD Competition Authority: https://www.oecd.org
- Investopedia: https://www.investopedia.com/terms/h/hhi.asp
Quick Reference
- Quantifies market concentration
- Formula: sum of squared market shares
- Key tool in antitrust regulation
Frequently Asked Questions (FAQs)
Why do regulators use HHI?
Because it provides a simple yet powerful measure of market dominance.
Can HHI detect collusion?
Not directly, but a high HHI indicates favorable conditions for collusion.
What happens if HHI increases after a merger?
Regulators may block or condition the merger if competition is significantly reduced.
