Herfindahl

Herfindahl, in the context of economics, most commonly refers to the Herfindahl index, also known as the Herfindahl–Hirschman index (HHI). The measure is named after Orris C. Herfindahl, who introduced it in 1950, with later attribution sometimes extending to Albert O. Hirschman. The index is widely used to assess market concentration and the level of competition within an industry.

Calculation and interpretation: The HHI is calculated as the sum of the squares of the market shares of all firms in a market. Market shares can be expressed as percentages (0 to 100) or as decimals (0 to 1). When expressed as percentages, the HHI ranges from 0 to 10,000; when expressed as decimals, it ranges from 0 to 1. A higher HHI indicates greater concentration. For example, one firm with a 100 percent share yields an HHI of 10,000 (or 1.0 in decimal form).

Usage and significance: The HHI is a standard tool in antitrust and competition policy, used by agencies such as the U.S. Department of Justice and the Federal Trade Commission to analyze mergers and market structure. Typical interpretation categories are: unconcentrated markets (HHI below 1,500), moderately concentrated markets (1,500–2,500), and highly concentrated markets (above 2,500). After a merger, changes in the HHI are considered: increases of more than about 200 points in highly concentrated markets, or more than about 100 points in moderately concentrated markets, typically trigger closer scrutiny.

Limitations: The HHI depends on the definition of the market and does not capture all dimensions of competition, such as dynamic rivalry or potential entry. It also does not account for price discrimination, multi-market effects, or non-price competition. As a concise measure, it is best used alongside qualitative analysis.