Herfindal-Hirschman Index
The Herfindahl-Hirschman Index (HHI) is a common measure of market concentration and is used to determine market competitiveness.
The index measures the size of companies relative to the size of the industry they are in and the amount of competitiveness. The HHI is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. It can range from close to zero to 10,000, with lower values indicating a less concentrated market.
$$ \text{HHI} = s_1^2 + s_2^2 + \dots + s_n^2 $$where $s_n = $ the market share percentage of firm $n$ expressed as a whole number, not a decimal.
How to read the index
The closer a market is to a monopoly, the higher the market’s concentration (and the lower its competition). If, for example, there was 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 roughly 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.
Mergers that increase the HHI by more than 200 points in highly concentrated markets raise antitrust concerns.