Herfindahl-Hirschman Index

Business, Legal & Accounting Glossary

Definition: Herfindahl-Hirschman Index




Full Definition of Herfindahl-Hirschman Index


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.

Usage

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. 

Antitrust

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.

Merger

A merger is the commingling of two or multiple companies. A merger is usually achieved by offering stockholders, securities of one company in acquiring company in exchange for giving up their stock.


Synonyms For Herfindahl-Hirschman Index


HHI

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Definition Sources


Definitions for Herfindahl-Hirschman Index are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 29th March, 2020 | 7 Views.