HHI Calculator (Herfindahl-Hirschman Index)
Calculate the Herfindahl-Hirschman Index (HHI) to measure market concentration and determine the level of competition in an industry for antitrust analysis.
Calculate Your HHI Calculator (Herfindahl-Hirschman Index)
What is the Herfindahl-Hirschman Index (HHI)?
The Herfindahl-Hirschman Index (HHI) is a widely accepted measure of market concentration used by competition authorities around the world. It helps regulators, economists, and business analysts assess the level of competition within an industry and identify potential monopolistic practices.
The HHI is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. The result can range from close to zero (for a market with many small firms) to 10,000 (for a market with a single monopolistic producer).
How to Calculate HHI
The formula for calculating the Herfindahl-Hirschman Index is:
Where s₁, s₂, s₃, ... sₙ are the market shares of each firm expressed as whole numbers (e.g., 20 for 20% market share), not decimals.
For example, if there are four firms with market shares of 30%, 30%, 20%, and 20%, the HHI would be:
This result indicates a highly concentrated market.
Interpreting HHI Values
According to the U.S. Department of Justice and the Federal Trade Commission Horizontal Merger Guidelines, markets are classified as:
Unconcentrated
HHI below 1,500
Markets with numerous competitors and relatively low concentration. Generally considered competitive.
Moderately Concentrated
HHI between 1,500 and 2,500
Markets with fewer major competitors or more uneven market share distribution. Some regulatory concerns may arise.
Highly Concentrated
HHI above 2,500
Markets with few competitors and significant market power. Such markets face greater regulatory scrutiny.
It's important to note that these thresholds serve as guidelines, not strict cutoffs. Regulatory bodies also consider other factors when evaluating market competition.
HHI and Antitrust Concerns
The HHI is a crucial tool for antitrust analysis, particularly when evaluating potential mergers and acquisitions:
- Unconcentrated Markets (HHI < 1,500): Mergers that increase the HHI by less than 100 points in unconcentrated markets typically don't require further analysis.
- Moderately Concentrated Markets (HHI 1,500 - 2,500): Mergers that increase the HHI by more than 100 points potentially raise competitive concerns.
- Highly Concentrated Markets (HHI > 2,500): Mergers that increase the HHI by more than 100 points may be presumed to enhance market power and face significant scrutiny. Those increasing HHI by 200+ points often face strong presumption of anti-competitive effects.
For example, if a proposed merger would increase the HHI from 2,600 to 2,850 (a 250-point increase) in an already highly concentrated market, it would likely trigger a detailed investigation by antitrust authorities.
Advantages of HHI
- Comprehensive Measurement: Unlike simpler metrics that only track the largest firms, HHI considers the market shares of all competitors.
- Reflects Distribution: By squaring market shares, HHI gives greater weight to firms with larger market shares, providing insight into market power distribution.
- Widely Accepted: HHI is recognized by competition authorities globally, making it a standard metric for competitive analysis.
- Mathematical Properties: HHI has useful mathematical properties that make it suitable for analytical models and comparisons across different markets.
- Merger Analysis Tool: HHI provides a clear framework for evaluating the competitive impact of mergers and acquisitions.
Limitations of HHI
- Market Definition Challenges: The accuracy of HHI depends on correctly defining the relevant market, which can be subjective and difficult.
- Snapshot in Time: HHI captures market concentration at a specific moment and may not reflect dynamic markets with rapid change.
- Ignores Other Factors: HHI doesn't account for barriers to entry, potential competition, or buyer power that may influence competitive dynamics.
- Global vs. Local Markets: In industries where competition may be local rather than national or global, a single HHI calculation may be misleading.
- Data Requirements: Calculating HHI requires accurate market share data for all significant competitors, which may not always be available.
Real-World Applications
Telecommunications
Regulatory bodies frequently use HHI to monitor concentration in mobile and broadband markets. For example, when T-Mobile and Sprint merged in the US, the HHI impact was a key consideration in the regulatory review process.
Banking and Financial Services
The Federal Reserve and other financial regulators use HHI to evaluate banking market concentration when reviewing proposed bank mergers.
Healthcare
HHI is used to analyze concentration in hospital markets, insurance markets, and pharmaceutical industries, particularly when evaluating healthcare provider mergers.
Retail
Competition authorities examine HHI when large retailers propose mergers or acquisitions, considering both national markets and local retail markets.
Technology
HHI analysis helps assess concentration in technology markets, though defining relevant markets can be particularly challenging in rapidly evolving tech sectors.
HHI and Market Structure Examples
| Market Structure | Market Share Distribution | HHI | Concentration |
|---|---|---|---|
| Perfect Competition | 100 firms with 1% each | 100 | Very Low |
| Competitive Market | 20 firms with 5% each | 500 | Low |
| Oligopoly (Equal) | 5 firms with 20% each | 2,000 | Moderate |
| Oligopoly (Unequal) | 40%, 30%, 20%, 10% | 3,000 | High |
| Duopoly | 50%, 50% | 5,000 | Very High |
| Near Monopoly | 90%, 10% | 8,200 | Extremely High |
| Monopoly | 100% | 10,000 | Maximum |
Frequently Asked Questions
The Herfindahl-Hirschman Index (HHI) is a measure of market concentration that's widely used by economists and antitrust regulators. It quantifies the level of competition or concentration within a defined market by:
- Taking the market share of each firm competing in the market
- Squaring each market share value
- Summing these squared values to produce a single number
The HHI can range from close to zero (in a market with many small competitors) to 10,000 (in a pure monopoly where one firm has 100% market share). Higher HHI values indicate greater market concentration and potentially less competition.
To calculate the Herfindahl-Hirschman Index (HHI):
- Identify all firms in the relevant market
- Determine the market share percentage for each firm (ensure the total equals 100%)
- Square each market share percentage (expressed as a whole number, not a decimal)
- Sum all the squared values to obtain the HHI
Example calculation:
- Firm A: 30% market share → 30² = 900
- Firm B: 25% market share → 25² = 625
- Firm C: 20% market share → 20² = 400
- Firm D: 15% market share → 15² = 225
- Firm E: 10% market share → 10² = 100
HHI = 900 + 625 + 400 + 225 + 100 = 2,250
This HHI of 2,250 indicates a moderately concentrated market.
According to the U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, markets are classified into three categories based on their HHI:
| HHI Range | Market Classification | Typical Regulatory Approach |
|---|---|---|
| Below 1,500 | Unconcentrated | Minimal antitrust concerns |
| 1,500 to 2,500 | Moderately Concentrated | Potential concerns if HHI increases by >100 points |
| Above 2,500 | Highly Concentrated | Significant concerns if HHI increases by >100-200 points |
Note: While these thresholds are widely used, they serve as guidelines rather than strict rules. Regulatory authorities consider multiple factors beyond HHI when evaluating market competition.
In merger analysis, HHI is used to:
- Establish a baseline: Calculate pre-merger HHI to determine the current market concentration
- Project the change: Calculate the post-merger HHI by combining the market shares of the merging firms
- Measure the impact: Determine the increase in HHI (delta) caused by the merger
Regulatory authorities typically use these measurements to determine the level of scrutiny a proposed merger requires:
- In unconcentrated markets (HHI < 1,500), mergers rarely raise competitive concerns
- In moderately concentrated markets (HHI 1,500-2,500), mergers that increase HHI by more than 100 points may warrant further investigation
- In highly concentrated markets (HHI > 2,500), mergers that increase HHI by more than 100-200 points create a presumption of enhanced market power
For example, if two firms with 20% and 10% market shares propose to merge in a market with an HHI of 2,000, the post-merger HHI would be 2,300 (replacing the separate shares with a combined 30% share). The 300-point increase would likely trigger significant antitrust scrutiny.
While HHI is widely used, it has several important limitations:
- Market definition challenges: HHI depends on correctly defining the relevant market, which can be subjective. Too narrow or too broad definitions can significantly skew the results.
- Static measure: HHI provides a snapshot at a single point in time and doesn't capture dynamic aspects of market competition or future developments.
- Ignores market barriers: HHI doesn't account for barriers to entry, switching costs, or other factors that might affect competition beyond market shares.
- Doesn't reflect competitive behavior: Similar HHI values can exist in markets with very different competitive dynamics and pricing behaviors.
- Geographic considerations: In markets where competition is local rather than national, a single HHI calculation may be misleading.
- Data quality issues: Accurate market share data may be difficult to obtain, especially for privately held companies or rapidly evolving markets.
Due to these limitations, regulatory authorities typically use HHI as one of several tools for competitive analysis rather than as a sole determinant.
HHI values correspond to different market structures along the spectrum from perfect competition to monopoly:
- Perfect Competition (HHI near 0): Many small firms each with minimal market share (e.g., 100 firms with 1% each would have an HHI of 100)
- Monopolistic Competition (HHI < 1,500): Many firms with some product differentiation but limited individual market power
- Oligopoly (HHI 1,500-7,000): A few large firms dominate the market
- Equal oligopoly: 5 firms with 20% each = HHI of 2,000
- Unequal oligopoly: Firms with 40%, 30%, 20%, 10% = HHI of 3,000
- Duopoly (HHI ~5,000-8,000): Two dominant firms control the market
- Equal duopoly: Two firms with 50% each = HHI of 5,000
- Unequal duopoly: Firms with 70% and 30% = HHI of 5,800
- Near Monopoly (HHI > 8,000): One firm has overwhelming market dominance (e.g., 90% market share would give HHI of at least 8,100)
- Pure Monopoly (HHI = 10,000): One firm controls 100% of the market
Different industries naturally tend toward different typical HHI ranges based on their economic characteristics, scale advantages, and regulatory environments.
Industries vary widely in their typical concentration levels:
Industries that typically have higher HHI values (more concentrated):
- Telecommunications: High infrastructure costs create natural oligopolies
- Airlines: Route-specific markets often have limited competition
- Technology platforms: Network effects lead to "winner-take-most" dynamics
- Utilities: Natural monopolies or highly regulated with few providers
- Automobile manufacturing: High capital requirements limit the number of viable competitors
Industries that typically have lower HHI values (less concentrated):
- Restaurants: Low barriers to entry allow many competitors
- Retail clothing: Many brands and stores compete in various segments
- Construction: Numerous local and regional contractors
- Professional services: Many law firms, accounting firms, consultancies
- Agriculture: Numerous farms and producers (though processing and distribution may be more concentrated)
Industry concentration can change over time due to technological disruption, regulatory changes, or consolidation trends. Some industries have also seen increasing concentration in recent decades.
Yes, while the Herfindahl-Hirschman Index is widely used globally, different competition authorities may apply different thresholds or interpretations:
- United States: Uses the thresholds of <1,500 (unconcentrated), 1,500-2,500 (moderately concentrated), and >2,500 (highly concentrated)
- European Union: Generally follows similar thresholds but may place more emphasis on other factors alongside HHI
- United Kingdom: The Competition and Markets Authority considers HHI but doesn't apply rigid thresholds
- Japan: The Japan Fair Trade Commission uses HHI but may apply different intervention standards
- China: The Anti-Monopoly Bureau considers HHI among other concentration measures
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