HHI Calculator (Herfindahl-Hirschman Index Calculator)
The HHI calculator is a tool that easily computes the value of the Herfindahl-Hirschman Index. The HHI Index measures the market concentration (not capitalization) of a particular industry and is used to determine market competitiveness.
The Herfindahl-Hirschman Index is typically used by regulators (such as the U.S. Department of Justice) to evaluate the potential impact mergers and acquisitions (M&A transactions) will have on an industry.
Keep reading this article to learn:
- What is the HHI Index?
- How to calculate HHI?
- What are the uses of the Herfindahl-Hirschman Index?
If you like this calculator, do not forget to try some of our other financial calculators, such as the economic value added calculator, a tool that measures a company's financial performance, or the Sharpe ratio calculator, to learn more about the attractiveness of a risky investment.
What is HHI Index (Herfindahl-Hirschman Index)?
As stated above, the Herfindahl-Hirschman Index is a widely used measure of market concentration that can be used to determine market competitiveness. Market concentration and market competitiveness are the economic concepts behind antitrust laws.
The name of the measure comes from the names of two economists who developed and popularised it. Although Orris Herfindahl was the great propagator of this measure in the 1950s, the measure was first proposed in 1945 by Albert Hirschman.
The HHI definition says it is the sum of the market shares (expressed as a percentage of all enterprises operating in a particular market (branch of industry) after they have been squared.
The value of the Herfindahl-Hirschman Index ranges from
10,000 / n (in the case of perfect competition) to 10,000 (in the case of a full monopoly). The formula for the Herfindahl-Hirschman Index is as follows:
HHI = s₁2 + s₂2 + s₃2 + … + sn2
sn — Market share (percentage) of firm n; and
n — Number of enterprises in a given market.
How to calculate HHI? – HHI calculation example
If you are wondering how to calculate the value of the HHI index, here is a simple example.
Let's assume that in our hypothetical industry there are seven competitive companies. The table below presents their market shares.
According to the formula given in the previous section, the value of HHI is:
HHI = 352 + 222 + 202 + 102 + 82 + 32 + 22 = 2286
An HHI of
2286 means that our hypothetical industry is moderately concentrated (for further explanation, see Herfindahl-Hirschman Index Scale).
Now let's check what will happen if company B merges with company C:
HHI= 352 + 422 + 102 + 82 + 32 + 22 = 3166
As you can see, the HHI increased significantly (880 points), so much so that it broke the limit of 2500 points. This means that after the merger of company B and company C, the market is highly concentrated.
Please note that, in some conventions, the value of the HHI index is expressed as a decimal — our examples would be 0.2286 and 0.3166, respectively.
Herfindahl-Hirschman Index usage
Note that the higher the market's concentration, the closer the market is to a monopoly. In terms of HHI, this means that high values of the index indicate a monopolized industry, while low values show a highly competitive market.
If, for example, there was only one huge company for a given industry, that company would have 100% of the market share. In this case, the value of the HHI index would be 10,000. On the other hand, if there were hundreds of small companies on the market, and each of them had nearly 0% market share, the HHI index would be around 0.
Generally, it is agreed that:
- HHI below 100 indicates a highly competitive industry;
- HHI between 100 and 1,500 indicates an unconcentrated industry;
- HHI between 1,500 to 2,500 indicates moderate market concentration; and
- HHI above 2,500 indicates high market concentration.
In addition, the Hirfindahl-Hirschman Index is utilized to assess the impact of mergers and acquisitions. Generally, increases of over 100 points, especially in already highly concentrated markets, may raise antitrust concerns.
In practice, the Herfindahl-Hirschman Index is used by the United States federal antitrust authorities, such as the Department of Justice and the Federal Trade Commission. These institutions use the HHI as a tool to determine whether a proposed merger is likely to raise antitrust concerns. The European Commission also uses changes in the HHI index when assessing mergers and acquisitions.
Last but not least, when using HHI to measure market competitiveness, you should remember that it is a simple measure. The advantage of using this indicator is that only a small amount of data is necessary, and the calculation is relatively simple. On the other hand, the primary disadvantage of HHI is that it is unable to take into account all of the complexities within a market.