The Herfindahl-Hirschman Index (HHI) is a measure of market concentration, used to evaluate the level of competition within an industry. It calculates the sum of the squares of the market shares of all firms in the market. The higher the HHI, the more concentrated the market is, indicating less competition.
Formula:
The HHI is calculated as: HHI=∑i=1N(Si2)HHI = \sum_{i=1}^N (S_i^2)HHI=i=1∑N(Si2)
Where SiS_iSi is the market share of the iii-th firm in the industry, and NNN is the total number of firms.
For example, if there are four firms in a market with market shares of 40%, 30%, 20%, and 10%, the HHI would be: HHI=(402)+(302)+(202)+(102)=1600+900+400+100=3000HHI = (40^2) + (30^2) + (20^2) + (10^2) = 1600 + 900 + 400 + 100 = 3000HHI=(402)+(302)+(202)+(102)=1600+900+400+100=3000
Interpretation:
- HHI < 1,500: The market is considered competitive with many players.
- HHI between 1,500 and 2,500: Moderate concentration, with some market power held by a few firms.
- HHI > 2,500: The market is highly concentrated, potentially leading to monopolistic or oligopolistic conditions.
