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HHI Formula:
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The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. It ranges from close to zero to 10,000.
The calculator uses the HHI formula:
Where:
Explanation: The index gives more weight to larger firms, making it sensitive to the distribution of firm sizes. A monopoly would have an HHI of 10,000 (100²), while perfect competition would approach zero.
Details: The HHI is used by competition regulators to evaluate mergers and acquisitions. Higher values indicate more concentrated markets and potentially less competition.
Tips: Enter the number of firms first, then input each firm's market share as a percentage. The sum of all shares must equal 100%.
Q1: What is considered a high HHI?
A: The U.S. Department of Justice considers markets with HHI below 1,500 to be competitive, 1,500-2,500 moderately concentrated, and above 2,500 highly concentrated.
Q2: How does HHI differ from concentration ratios?
A: While concentration ratios (e.g., CR4) only look at top firms, HHI considers all firms and gives more weight to larger ones, providing a more complete picture.
Q3: What are the limitations of HHI?
A: HHI doesn't account for potential competition, global markets, or barriers to entry. It also assumes market shares accurately reflect competitive positions.
Q4: How is HHI used in merger analysis?
A: Regulators examine both the post-merger HHI and the change in HHI. Large increases in concentrated markets may trigger antitrust concerns.
Q5: Should HHI be calculated with revenue or units?
A: Typically calculated using revenue market shares, but unit shares may be more appropriate in some industries (like commodities).