What is the 'Herfindahl-Hirschman Index - HHI'

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 a
market, and then summing the resulting numbers, and can range from close to zero to
10,000. The U.S. Department of Justice uses the HHI for evaluating potential mergers
issues.

BREAKING DOWN 'Herfindahl-Hirschman Index - HHI'

The closer a market is to being a monopoly, the higher the market's concentration (and
the lower its competition). If, for example, there were only one firm in an industry, that
firm would have 100% market share, and the HHI would equal 10,000, indicating a
monopoly. If, there were thousands of firms competing, each would have nearly 0%
market share, and the HHI would be close to zero, indicating nearly perfect competition.

The U.S. Department of Justice considers a market with an HHI of less than 1,500 to be
a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated
marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.
As a general rule, mergers that increase the HHI by more than 200 points in highly
concentrated markets raise antitrust concerns, as they are assumed to enhance market
power under the section 5.3 of the Horizontal Merger Guidelines jointly issued by the
department and the Federal Trade Commission (FTC).

Herfindahl-Hirschman Index
The herfindahl_hirschman index is calculated by the formula
The herfindahl_hirschman index(HHI)=
Firm1s market size2 + Firm 2s market size2+_+
Firm Ns market size2
where N is the number of firms in the market
A herfindahl-hirschman index (HHI) over .18 or 1800 is considered to highly
concentrated
A HHI index below 0.01 or(100)
Indicates a highly competitive market.
A HHI index below 0.1 or(1000)
Indicates an unconcentrated market.
A HHI index between 0.1 to 0.18 or (1000 to 1800)
Indicates moderate market concentration
A HHI index above0.18 (above 1800)
Indicates high market concentration
Calculating herfindahl-Hirschman
Index using percent of market share
Herfindahl-hirschman index
Firm Market share in Market share
percent
A 38% .38
B 25% .25
C 20% .20
D 17% .17

HHI = (market size of firm A)2 + (market size of firm B)2

+( market size of firm c)2 +( market size of firm D)2
HHI (38)2 + (25)2 + (20)2 = (17)2
HHI = 1444 + 625 + 400 + 289
HHI = 2069 + 400 + 289
HHI = 2469 + 289
HHI = 2758
A HHI index below 100
Indicates a highly competitive market.
A HHI index below 1000
Indicates an unconcentrated market.
A HHI index between 1000 to 1800
Indicates moderate market concentration
A HHI index above 1800
Indicates high market concentration
Since 2,758 greater than 1800, there is high market concentration in this market.
Calculating herfindahl-hiirschman index
using decimal fractions of market share.
Herfindahl-hirschman index
Firm Market share in Market share
percent
A 38% .38
B 25% .25
C 20% .20
D 17% .17
HHI = (0.38)2 + (0.25)2 + (0.20)2 + (0.17)2
HHI = 0.1444 + 0.0625 + 0.04 + 0.0289
HHI = 0.2069 + 0.04 + 0.0289
HHI = 0.2469 + 0.0289
HHI = 0.2758
A HHI index below 0.01
Indicates a highly competitive market.
A HHI index below 0.1
Indicates an unconcentrated market.
A HHI index between 0.1 to 0.18
Indicates moderate market concentration
A HHI index above 0.18
Indicates high market concentration
Since 0.28 is greater than0.18, there is high market concentration in this market.