Herfindahl Index Calculator

The Herfindahl Index (or Herfindahl-Hirschman Index, HHI) is a measure of market concentration and is used to assess the level of competition within an industry. It is calculated by summing the squares of the market shares of all firms in the market. The result ranges from 0 to 1, with higher values indicating a higher level of market concentration.

Historical Background

The Herfindahl Index was developed independently by economists Orris C. Herfindahl and Albert O. Hirschman. The index is commonly used by regulators, such as the U.S. Department of Justice, to evaluate potential mergers and acquisitions that may affect market competition.

Calculation Formula

The Herfindahl Index is calculated using the following formula:

\[ \text{HHI} = \sum_{i=1}^{N} \left(\frac{S_i}{100}\right)^2 \]

Where:

• \(N\) is the number of firms in the market.
• \(S_i\) is the market share of firm \(i\) expressed as a percentage.

Example Calculation

For a market with four firms having market shares of 30%, 25%, 25%, and 20%, the Herfindahl Index is calculated as:

\[ \text{HHI} = \left(\frac{30}{100}\right)^2 + \left(\frac{25}{100}\right)^2 + \left(\frac{25}{100}\right)^2 + \left(\frac{20}{100}\right)^2 = 0.09 + 0.0625 + 0.0625 + 0.04 = 0.255 \]

Importance and Usage Scenarios

The Herfindahl Index is a critical tool for understanding the competitive landscape of an industry. It helps to identify monopolies or oligopolies and assess the potential impact of mergers on market competition. Regulators and policymakers use the HHI to ensure fair competition and prevent excessive market concentration.

Common FAQs

1. What is considered a high Herfindahl Index?

   • An HHI above 0.25 (or 2,500 in traditional terms) indicates a highly concentrated market.

2. Why is the Herfindahl Index important?

   • The HHI is important because it provides a simple yet effective measure of market concentration, helping to inform decisions on mergers, acquisitions, and antitrust regulations.

3. How does the HHI compare to other measures of market concentration?

   • The HHI is more sensitive to changes in market structure than the Concentration Ratio (CR), as it accounts for the distribution of market shares across all firms, not just the largest ones.

This calculator simplifies the process of determining the Herfindahl Index, making it a valuable tool for economists, regulators, and business strategists.