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Introduction to HHI: The Herfindahl-Hirschman Index (HHI) serves as a crucial measure of market concentration, providing insights into market competitiveness. This index is extensively employed by regulatory bodies, including the U.S. Department of Justice, to evaluate the potential impact of mergers and acquisitions on different industries.

What is the HHI Index?

Definition and Origin: The HHI is named after economists Orris Herfindahl and Albert Hirschman, who introduced and popularized it. It quantifies market concentration by summing the squares of market shares expressed as a percentage for all enterprises in a specific market.

HHI Formula: The formula for calculating HHI is HHI = s₁² + s₂² + s₃² + … + sn², where ‘sn’ represents the market share percentage of firm ‘n,’ and ‘n’ is the number of enterprises in the market.

Range of Values: The HHI ranges from 10,000/n (perfect competition) to 10,000 (full monopoly), providing a spectrum for assessing market competitiveness.

How to Calculate HHI: Example

Illustrative Calculation: Consider an industry with seven companies and their respective market shares. Applying the HHI formula, we calculate the HHI for the initial scenario and after a hypothetical merger between two companies.

Initial HHI: 2286 Post-Merger HHI: 3166

Interpreting HHI Values

Market Concentration Scale: HHI values offer insights into market competitiveness:

  • Below 100: Highly competitive industry
  • 100 to 1,500: Unconcentrated industry
  • 1,500 to 2,500: Moderate market concentration
  • Above 2,500: High market concentration, indicating potential monopolization

Herfindahl-Hirschman Index in Practice

Regulatory Use: Federal antitrust authorities, such as the U.S. Department of Justice and the Federal Trade Commission, utilize the HHI to assess mergers and acquisitions. A significant increase in HHI, particularly in already concentrated markets, may trigger antitrust concerns.

International Application: The European Commission also incorporates changes in the HHI index when evaluating mergers and acquisitions.

Advantages and Limitations of HHI

HHI Advantages:

  • Simplicity: HHI requires minimal data and straightforward calculations.

HHI Limitations:

  • Complexity Oversights: HHI may not capture all market complexities.

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