Measuring Market Concentration: Understanding the Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index (HHI) is a widely used measure in antitrust and competition analysis that helps assess the level of competition in an industry. In this article, we will understand how the HHI is calculated, its significance, and how it is used in evaluating the effects of mergers and acquisitions on market concentration.

What is the Herfindahl-Hirschman Index (HHI)?

The HHI is calculated by squaring the market share of each firm in an industry and then summing up these values. A result is a number between 0 and 10,000, with a higher HHI indicating a more concentrated market and a lower HHI indicating a more competitive market.

Interpreting the HHI:

The HHI is used to determine whether a market is considered to be a “monopoly” or “oligopoly.” A market with a very high HHI (typically over 2,500) is considered a highly concentrated market with a small number of large firms dominating the market, while a market with a low HHI (typically below 1,500) is considered to be a competitive market with many small firms.

HHI in Mergers and Acquisitions:

The HHI can be used to assess the effects of mergers and acquisitions on market concentration. If a merger or acquisition results in a significant increase in the HHI, it may indicate that the merger or acquisition could lead to reduced competition and higher prices for consumers.

Evaluating the Competitive Effects of Mergers and Acquisitions:

The HHI is also used to evaluate the competitive effects of a proposed merger or acquisition. Before a merger or acquisition can be approved by regulators, the HHI of the industry in question is calculated before and after the merger or acquisition. If the merger or acquisition results in a substantial increase in the HHI, it may be seen as a concern and regulators may further investigate to evaluate the potential anti-competitive effects of the merger or acquisition.

In conclusion, the Herfindahl-Hirschman Index (HHI) is a measure of market concentration that is used to assess the level of competition in an industry. It can help regulators and antitrust agencies to decide on whether a merger or acquisition will potentially decrease the competition in the market which could lead to increased prices and less innovation for customers. It is a widely used tool in antitrust and competition analysis and helps in evaluating the effects of mergers and acquisitions on market concentration.