Common questions about HHI
What is the Herfindahl-Hirschman Index (HHI)?
HHI is a market concentration measure computed by summing the squared market share of every firm in a market. It ranges from near zero for highly competitive markets to 10,000 for a pure monopoly. Competition authorities like the U.S. DOJ and FTC use HHI as one tool for assessing competition levels and merger effects.
What is the HHI formula and what are the two scales used?
The formula is HHI equals the sum of s_i squared, where s_i is each firm’s market share. If shares are in percent, the HHI scale is 0 to 10,000. If shares are in decimals, the HHI scale is 0 to 1. Example: a market with shares of 30, 30, 20, and 20 percent gives HHI 2,600, or 0.26 on the decimal scale.
How do the DOJ and FTC read HHI values?
The 2010 Horizontal Merger Guidelines issued August 19, 2010 use three bands: below 1,500 unconcentrated, 1,500 to 2,500 moderately concentrated, and above 2,500 highly concentrated. The 2023 Merger Guidelines issued December 18, 2023 use different thresholds: a market counts as highly concentrated when post-merger HHI exceeds 1,800, and an HHI increase above 100 points can trigger a structural presumption. These are general U.S.-jurisdiction guidelines, not legal advice.
How is the change in HHI from a merger computed?
A two-firm merger raises HHI by twice the product of their shares: delta HHI equals 2 times sA times sB. Example: two firms with 20 percent shares merging produce an 800-point increase, so a market with HHI 2,000 becomes 2,800 after the merger.
Apa keterbatasan HHI?
HHI depends heavily on how the market is defined, including product boundaries, geographic area, and time period. Too narrow a market definition makes HHI look high, while too broad a definition makes it look low. HHI is also only as good as the market-share data used and does not capture factors like entry barriers or innovation.
What is the difference between HHI and the CR4 concentration ratio?
CR4 is the sum of the top four firms’ shares, so it is linear and ignores the distribution among the four. HHI squares every share, giving greater weight to dominant firms. Example: two markets both with CR4 80, but a market with shares 50, 10, 10, 10 has HHI 2,800 while a market with shares 20, 20, 20, 20 has HHI 1,600.
What is the equivalent number of firms?
The equivalent number of firms is how many equal-sized firms would produce the same HHI, computed as N equals 10,000 divided by HHI. Example: a market with HHI 2,500 equals 4 equal-sized firms. The number helps picture the concentration level intuitively.