Business, Legal & Accounting Glossary
Herfindahl-Hirschman Index (HHI) is described as a measure of market concentration. This index is computed by squaring the market share of each business firm or company competing in the market and then summing numbers that are generated. Herfindahl-Hirschman Index number may range from near 0 to 10,000. A decrease in HHI indicates a loss of market share while an increase indicates the converse.
If there are n business firms in a given industry, then the Herfindahl-Hirschman Index may be denoted as:
HHI = s12 + s22 + s32 +….+ sn2
where si is ith the firm’s market share.
Herfindahl-Hirschman Index will vary with changes in market share among bigger business firms. A market characterized by monopoly will have higher HHI. For example, if a single company dominates (100 per cent market share) then index will equal 10,000-exhibiting a monopoly. In a competitive market, with thousands of business firms competing for customers, HHI would be near zero-indicating perfect competition.
Governments worldwide use the Herfindahl-Hirschman Index for assessing mergers. A competitive marketplace is considered to be one with HHI lower than 1,000. On the other hand, a market with HHI of 1,800 or more is considered highly concentrated. A market at this level has potent anti-trust concerns. Anti-trust concerns are also raised when a transaction may increase market HHI by more than 100 points.
Anti-trust laws are legal safeguards that prohibit unfair trade practices. Anti-trust laws can be applied to any kind of industry and to a wide level of business like transportation, marketing, manufacturing and distribution. List of illegal practices include efforts to preserve or achieve monopoly and price-fixing.
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This glossary post was last updated: 29th March, 2020 | 7 Views.