Herfindahl-Hirschman Index
Also called: HHI · Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
The Herfindahl-Hirschman Index (HHI) measures market concentration, which is how much of a market a few firms control. It adds up the squared market shares of all firms:
HHI = Σ (sᵢ)², with each share sᵢ in per cent.
It runs from near 0, when there are very many tiny firms, to 10,000, when there is a monopoly (100² = 10,000). Squaring gives extra weight to big firms. The US DOJ/FTC Merger Guidelines (2023) call a market with HHI above 1,800 highly concentrated. In such a market, a merger that raises HHI by more than 100 is presumed to harm competition.
Example
Firms with shares of 40, 30, 20 and 10 give HHI = 1,600 + 900 + 400 + 100 = 3,000, which is highly concentrated. Ten equal firms of 10% each give only 1,000.
Don't confuse with
- Concentration ratio (CR4): this only adds the top four firms' shares without squaring them. So shares of 70-10-10-10 and 25-25-25-25 both give CR4 = 100%, but their HHIs are 5,200 and 2,500.
Related concepts
- Market structure
- Market power
- Barriers to entry
- Product differentiation
- Market concentration
- Concentration ratio
- Price maker