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What is ‘Herfindahl-Hirschman Index – HHI’
The Herfindahl-Hirschman Index (HHI) is a common standard of market concentration that is used to determine market competitiveness, ordinarily pre and post M&A transactions.
The Herfindahl-Hirschman index (HHI) is a commonly accepted measure of vend concentration. It is calculated by squaring the market share of each firm vying in a market and then summing the resulting numbers. It can range from privy to zero to 10,000. The U.S. Department of Justice uses the HHI for evaluating potential coalescences issues. The HHI is expressed as: HHI = s1^2 + s2^2 + s3^2 + …
BREAKING DOWN ‘Herfindahl-Hirschman Index finger – HHI’
The closer a market is to a monopoly, the higher the market’s concentration (and the lower its contest). If, for example, there were only one firm in an industry, that unwavering would have 100% market share, and the Herfindahl-Hirschman Index (HHI) liking equal 10,000, indicating a monopoly. If, there were thousands of firms colliding, each would have nearly 0% market share, and the HHI last wishes a be close to zero, indicating nearly perfect competition.
The U.S. Department of Imprisonment considers a market with an HHI of less than 1,500 to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a sort of concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace. As a overall rule, mergers that increase the HHI by more than 200 hints in highly concentrated markets raise antitrust concerns, as they are pseudonymous to enhance market power under the section 5.3 of the Horizontal Fusing Guidelines jointly issued by the department and the Federal Trade Commission (FTC).
Herfindahl-Hirschman Thesaurus Example Calculations
The HHI is calculated by taking the market share of each set up in the industry, squaring them, and summing the result:
HHI = s1^2 + s2^2 + s3^2 + … + sn^2 (where s is the store share of each firm expressed as a whole number, not a decimal)
Reflect on the following hypothetical industry with four total firms:
Constant one market share = 40%
Firm two market share = 30%
Firm three Stock Exchange share = 15%
Firm four market share = 15%
The HHI is calculated as:
HHI = 40^2 + 30^2 + 15^2 + 15^2 = 1,600 + 900 + 225 + 225 = 2,950
This is estimated a highly concentrated industry, as expected since there are only four enterprises. But the number of firms in an industry does not necessarily indicate anything with regard to market concentration, which is why calculating the HHI is important. For example, assume an manufacture has 20 firms. Firm one has a market share of 48.59% and each of the 19 unused firms has a market share of 2.71% each. The HHI would exactly 2,500, intimating a highly concentrated market. If firm number one had a market share of 35.82% and each of the left over firms had 3.38% market share, the HHI would be exactly 1,500, saying a competitive marketplace.