Herfindahl Hirschman Index (HHI) - Explained
What is the Herfindahl Hirschman Index?
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What is the Herfindahl-Hirschman Index?
The Herfindahl-Hirschman Index (HHI), also shortened to Herfindahl Index is a commonly accepted method of measurement of market concentration as a means to ascertain whether competitiveness exists within an industry or if market monopoly has set in. More often than not, the Herfindahl-Hirschman Index measures market concentration of the top 50 companies of an industry. Economists calculate the Herfindahl-Hirschman Index (HHI) in an industry by squaring the market share of competing firms pertaining to that particular industry and then adding up the squares. The index is measured in points - any value above zero and up to 10,000 points is an acceptable value for the HHI.
How is the Herfindahl-Hirschman Index Used?
Market monopoly stems from high market concentration and a significant reduction of competition. Any firm that has a monopoly in the market will have an HHI close to 10,000; in case the firm is the only player in its industry segment, it will have a 100% market share and thus, an HHI of 10,000. Conversely, if there were several thousand competing firms in an industry, each firm would have virtually 0% market share. In such an instance, the HHI would approach zero, signifying a scenario of perfect competition. According to the U.S. Department of Justice, any industry with an HHI below 1,500 is considered a competitive industry. Similarly, an HHI value between 1,500 and 2,500 denotes a moderately concentrated industry. Finally, an industry with an HHI of 2,500 or more is designated a highly concentrated industry. Generally, any merger that raises the the Herfindahl-Hirschman Index by more than 200 points in extremely concentrated markets renders it vulnerable to antitrust issues.
Herfindahl-Hirschman Index Example Calculations
The Herfindahl-Hirschman Index is calculated by squaring the market share of competing firms and then adding up the squares: HHI = (market share 1) + (market share 2)+ (market share 3) + ... + (market share n) , market share values with decimals being rounded off as whole numbers Let us suppose there are four footwear manufacturers in an industry: Manufacturer 1 market share = 30% Firm two market share = 26% Firm three market share = 24% Firm four market share = 20% The HHI calculation is as follows: HHI = 30 + 26 + 24 + 20 = 900 + 676 + 576 + 400 = 2,552 In the above example, while the presence of only four firms in an industry anyhow depicts a highly concentrated industry, this depiction is reinforced by the HHI value of 2,552, which, according to the U.S. Department of Justice, corresponds to a highly concentrated industry. The HHI thus comes across as an invaluable and reliable index to measure market concentration.
- What is the Sherman Act of 1890 (Sherman Act)?
- What is a Contract, Combination, of Conspiracy in restraint of trade?
- What is Per Se Illegality and the Rule of Reason?
- What is a Monopoly?
- Herfindahl Hirschman Index (HHI) Definition
- What businesses are exempt from the Sherman Act?
Other Related Topics
- Market Structure
- Perfect Competition
- Bidding War
- Substitution Effect
- Imperfect Competition
- Market Power
- Price Takers
- Price Makers
- Perfect Competition and Decision Making
- Captive Market
- Contestable Market Theory
- Highest Profit Point in a Perfectly Competitive Market
- Using Marginal Revenue and Marginal Costs to Maximize Profit
- Marginal Revenue Curve
- Profit Margin and Average Total Cost
- Break Even Point - Cost Curve
- Shutdown Point - Cost Curve
- Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
- Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
- Decisions to Enter or Exit a Market in the Long Run
- Long-Run Equilibrium in a Perfectly Competitive Market
- Constant, Increasing, and Decreasing Cost Industries
- Productive and Allocative Efficiency in Perfectly Competitive Markets
- Market Efficiency
- Market Inefficiency
- Pareto Efficiency
- Search Theory
- Natural Monopoly
- Legal Monopoly
- Bilateral Monopoly
- Promoting Innovation through Intellectual Property
- Predatory Pricing
- How Monopolists Set Price with the Demand Curve
- Total Cost and Total Revenue for a Monopolist
- Marginal Revenue and Marginal Cost for a Monopolist
- Inefficiency of Monopoly
- Perfectly Competitive Market
- Monopolistic Competition
- Differentiated Products
- Perceived Demand for a Monopolistic Competitor
- Monopolistic Competitors Choose Price and Quantity
- Monopolistic Competitors and Entry
- Monopolistic Competition and Efficiency
- Cartel (Economics)
- Game Theory
- Traveler's Dilemma
- Prisoner's Dilemma
- Iterated Prisoner's Dilemma
- Nash Equilibrium
- Diner's Dilemma
- Trembling Hand Perfect Equilibrium
- Gambler's Fallacy
- Arrows Impossibility Theorem
- Backward Induction
- Tournament Theory
- Oligopoly and the Prisoner’s Dilemma
- Forcing Cooperation in a Prisoner’s Dilemma
- Cooperation and the Kinked Demand Curve
- Corporate Merger or Acquisition
- Antitrust Laws
- Herfindahl-Hirschman Index
- Concentration Ratio
- Other Approaches to Measuring Monopoly Power in an Industry
- Restrictive Practices under Antitrust Law
- Natural Monopoly
- Cost-Plus Regulation
- Price Cap Regulation
- Regulatory Capture