The Herfindahl Index (often abbreviated as HHI) is a measure of market concentration used to assess the level of competition within an industry. It is calculated by summing the squares of the market shares of all firms operating in that industry. Mathematically, it is expressed as:
where represents the market share of the -th firm and is the total number of firms. The index ranges from 0 to 10,000, where lower values indicate a more competitive market and higher values suggest a monopolistic or oligopolistic market structure. For instance, an HHI below 1,500 is typically considered competitive, while an HHI above 2,500 indicates high concentration. The Herfindahl Index is useful for policymakers and economists to evaluate the effects of mergers and acquisitions on market competition.
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