“The Herfindahl-Hirschman Index (HHI) is a common, 0 to 10 000-point metric used in economics and antitrust law to measure market concentration and competitiveness. A high HHI indicates low competition and potential monopoly power, while a low HHI suggests a competitive market.” – Herfindahl-Hirschman Index (HHI)
The **Herfindahl-Hirschman Index (HHI)** serves as a widely recognised measure of market concentration, quantifying the size of firms relative to their industry and indicating the level of competition within it. Calculated by squaring the market share of each firm (expressed as a percentage) and summing the results, the HHI ranges from close to 0 in highly fragmented markets with many small firms to 10,000 in a complete monopoly where one firm holds 100% share1,2,3. This approach weights larger firms more heavily than simpler concentration ratios, providing a nuanced view of market power1.
The formula is HHI = \sum_{i=1}^{N} (s_i)^2, where s_i represents the market share of firm i as a percentage, and N is the number of firms1,2,3. For instance, in a market with five equal firms each holding 20% share, the HHI is 5 \times (20)^2 = 2,000, indicating moderate concentration1. Regulators, such as the U.S. Department of Justice, classify markets as follows: below 1,500 points signals low concentration (competitive); 1,500 to 2,500 indicates moderate concentration; and above 2,500 denotes high concentration with potential monopoly risks3,7. A merger increases the HHI by twice the product of the merging firms’ shares, aiding quick antitrust assessments6.
In antitrust enforcement, a high HHI or significant post-merger increase flags reduced competition, potential price hikes, and diminished consumer choice2,7. Its simplicity, reliance on readily available market share data, and sensitivity to distribution make it preferable over alternatives1,4. A normalised variant adjusts for the number of firms, ranging strictly from 0 to 1: HHI^* = \frac{HHI - \frac{1}{N}}{1 - \frac{1}{N}} for N > 11.
Key Theorist: Albert O. Hirschman
Albert O. Hirschman (1915-2012), an influential development economist and intellectual, shares naming honours for the HHI alongside Orris C. Herfindahl. Born in Berlin to a secular Jewish family, Hirschman fled Nazi Germany in 1933, adopting the alias Albert Vatenrhoda during wartime service with the U.S. Army. He earned a doctorate in economics from the University of Trieste in 1938 and later joined the Federal Reserve Board, where in 1945 he authored National Power and the Structure of Foreign Trade, introducing the index-originally the Index of Concentration for Imports and Exports-to analyse trade patterns and national economic power1.
Hirschman’s link to the HHI stems from this work on international trade concentration, predating its antitrust adaptation. Independently, geologist Orris C. Herfindahl developed a similar measure in 1950 for analysing copper industry concentration in his Columbia University dissertation1. The index gained prominence in U.S. antitrust via the 1982 Merger Guidelines, evolving into a cornerstone for merger reviews worldwide2,3. Hirschman’s broader legacy spans Exit, Voice, and Loyalty (1970), probing responses to organisational decline, and contributions to Latin American development policy, reflecting his interdisciplinary approach blending economics, psychology, and politics.
References
1. https://en.wikipedia.org/wiki/Herfindahl%E2%80%93Hirschman_index
2. https://www.omnicalculator.com/finance/hhi
3. https://corporatefinanceinstitute.com/resources/valuation/herfindahl-hirschman-index-hhi/
5. https://www.youtube.com/watch?v=Ku7DRM_VYeI
6. https://umbrex.com/resources/economics-concepts/microeconomic-theory/herfindahl-hirschman-index-hhi/
7. https://www.unclaw.com/chin/teaching/antitrust/herfindahl.htm
8. https://www.promarket.org/2024/06/24/an-explainer-on-how-market-concentration-is-measured/
