Herfindahl-Hirschman Index - HHI
A commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000. The HHI is expressed as:
HHI = s1^2 + s2^2 + s3^2 + ... + sn^2 (where sn is the market share of the ith firm).
The closer a market is to being a monopoly, the higher the market's concentration (and the lower its competition). If, for example, there were only one firm in an industry, that firm would have 100% market share, and the HHI would equal 10,000 (100^2), indicating a monopoly. Or, if there were thousands of firms competing, each would have nearly 0% market share, and the HHI would be close to zero, indicating nearly perfect competition.
The U.S. Department of Justice uses the HHI for evaluating mergers.
Investopedia Commentary
The U.S. Department of Justice considers a market with a result of less than 1,000 to be a competitive marketplace a result of 1,000-1,800 to be a moderately concentrated marketplace and a result of 1,800 or greater to be a highly concentrated marketplace. As a general rule, mergers that increase the HHI by more than 100 points in concentrated markets raise antitrust concerns.
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See also: Anti-trust, Cartel, Dog Eat Dog, Duopoly, Merger, Monopoly, Oligopoly, Oligopsony, Perfect Competition, Price Fixing
Also spelled: HHI