How do you calculate the Herfindahl-Hirschman Index?

How do you calculate the Herfindahl-Hirschman Index?

The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600).

What is a high Herfindahl-Hirschman Index?

The Herfindahl-Hirschman Index (HHI) is used to determine market competitiveness. A market with an HHI of less than 1,500 is considered a competitive marketplace, an HHI of 1,500 to 2,500 is moderately concentrated, and an HHI of 2,500 or greater is highly concentrated.

What does a low Herfindahl-Hirschman Index mean?

The Herfindahl-Hirschman Index is an index that measures the market concentration of an industry. A low degree of concentration means that the industry is closer to a perfect competition scenario, where many firms of more or less equal size share the market.

How do you interpret the Herfindahl index?

Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Alternatively, if whole percentages are used, the index ranges from 0 to 10,000 “points”. For example, an index of . 25 is the same as 2,500 points.

What is a high concentration ratio?

Concentration ratio indicates the level of competition between firms comprised in an industry. It is the ratio of the size of the firms to the entire industry. A high concentration ratio closer to 100% indicates the existence of a monopoly in an industry or lack of competition to such firms.

What is a highly concentrated market?

Definition: Market concentration is used when smaller firms account for large percentage of the total market. If the top firms keep on gaining market share, then we say that the industry has become highly concentrated.

What is the maximum value of the Herfindahl index?

10,000
The HHI reaches a maximum value of 10,000 when a monopoly exists in which one firm has 100 percent of the market, that is, the HHI = (100)2 = 10,000.

What is the 4 firm concentration ratio?

The four-firm concentration ratio, which consists of the market share of the four largest firms in an industry, expressed as a percentage, is a commonly used concentration ratio. The three-firm and five-firm are two more concentration ratios that can be used.

How is the Herfindahl-Hirschman Index ( HHI ) calculated?

Herfindahl-Hirschman Index. The term “HHI” means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20,…

What’s the difference between Herfindahl index and normalized Index?

There is also a normalized Herfindahl index. Whereas the Herfindahl index ranges from 1/ N to one, the normalized Herfindahl index ranges from 0 to 1. It is computed as: where again, N is the number of firms in the market, and H is the usual Herfindahl Index, as above.

How does the Justice Department use the Herfindahl index?

The Justice Department uses the Herfindahl Index to decide whether certain mergers are good for competition in the marketplace. A market with an HHI under 1,000 is considered competitive.

What makes a market competitive according to Herfindahl index?

A market with an HHI under 1,000 is considered competitive. The Justice Department is likely to scrutinize a merger in an industry with a post-merger HHI of between 1,000 and 1,800, and it is almost certain to outright reject approval for mergers that result in a post-merger HHI which exceed 1,800.