What is the Herfindahl-Hirschman Index (HHI)?

How to Calculate the Herfindahl-Hirschman Index (HHI)

What it is:.

The Herfindahl-Hirschman Index (HHI) is a common measure of market concentration that is used to determine market competitiveness, often pre and post M&A transactions. The Herfindahl-Hirschman Index is an index that measures the market concentration of a certain industry. A highly concentrated industry would mean a high degree of concentration, whereby only a few players in the industry hold a large percentage of the market share, leading to a near- monopolistic Monopolistic Competition situation.

How it works (Example):

It is computed as:. Using the normed Herfindahl index, information about the total number of players N is lost, as shown in the following example: Thus, the normalized Herfindahl index can serve as a measure for the equality of distributions, but is less suitable for concentration. The usefulness of this statistic to detect monopoly formation, however, is directly dependent on a proper definition of a particular market which hinges primarily on the notion of substitutability.

The United States federal anti-trust authorities such as the Department of Justice and the Federal Trade Commission use the Herfindahl index as a screening tool to determine whether a proposed merger is likely to raise antitrust concerns. Increases of over 0. But as market shares of the firm industry diverge from equality the Herfindahl can exceed that of the equal-market-share 3-firm industry e. A higher Herfindahl signifies a less competitive industry. The Herfindahl index is also a widely used metrics for economic concentration.

A low H-index implies a very diversified portfolio: The H-index has been shown to be one of the most efficient measures of portfolio diversification. If the number of firms in the market is held constant, then a higher variance due to a higher level of asymmetry between firms' shares that is, a higher share dispersion will result in a higher index value.

From Wikipedia, the free encyclopedia. This article is about the economic measure. For the index of scientific prolificacy, see H-index. Retrieved 4 May If all firms have equal share the reciprocal of the index shows the number of firms in the industry. Banking and Financial Institutions Law in a Nutshell. Bain Shimshon Bichler Robert A.

Simon Frank Stilwell George W. Accelerator effect Administered prices Barriers to entry Bounded rationality Conspicuous consumption Conspicuous leisure Conventional wisdom Countervailing power Effective competition Herfindahl index Hiding hand principle Hirschman cycle Instrumentalism Kuznets cycles Market concentration Market power Market structure Penalty of taking the lead Satisficing Shortage economy Structure—conduct—performance paradigm Technostructure Theory of two-level planning Veblen goods Veblenian dichotomy.

Behavioral Economics Development economics Economic sociology English historical school of economics French historical school Historical school of economics Legal realism New Institutional Economics Post-Keynesian economics. Retrieved from " https: Valuation finance Market structure Monopoly economics Imperfect competition. Views Read Edit View history.

This page was last edited on 4 April , at By using this site, you agree to the Terms of Use and Privacy Policy. In this case, however, it refers to a metric that represents industry concentration. The purpose of the Herfindahl Index is to assess the relative or comparative size of the major companies in a particular industry or market.

The Herfindahl Index takes into account a number of factors that give analysts and experts a better, more comprehensive view of the health of a specific market. When that market is populated by a lot of big companies, all of them relatively the same size, the index will be at or near zero.

On the other hand, if a specific industry or market is dominated by a single company, the index will be dramatically bigger. The index is inversely proportionate to the number of companies in that market.

It's also inversely proportionate to the difference in size between those companies. This means that the closer a market is a true monopoly, the larger that firm's market share would be.

For example, let's assume a specific industry only has a single viable business, Smith Inc. As a result, its HI would be 10, Let's assume the opposite scenario. If an industry has thousands of companies, each of them roughly the same size, the HI would be close to zero.

An HI score close to zero would indicate a market that's enjoying a nearly ideal state of competition. The risk of a monopoly like the HI would be nearly zero. Of course, there's a lot of room in between these two extreme examples. Department of Justice, in analyzing potential monopoly and antitrust cases, considers any market with a Herfindahl Index lower than 1, to be in a state of healthy competition.

DOJ also analyzes corporate mergers for the change in the HI that the merger would trigger. So, for example, any merger that would result in a change in the HI of points or more raises serious antitrust concerns for the DOJ analysts and investigators. While the concepts may sound similar, market share and the Herfindahl Index are not the same, nor do they measure the same thing.

It's usually measured in a single year or another time period. Knowing a company's market share gives you an idea of how big a specific company is, relative to its competitors or other companies in the same market or type of business.

HI or HHI utilizes market share in its formula, but it doesn't measure the same thing. The HI looks at the market as a whole, while market share looks specifically at an individual company within that market.

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One tool designed to shed light on these concerns is the Herfindahl Index.

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