HerfindahlHirschmanindex

The Herfindahl-Hirschman index (HHI) is a mathematical formula used to measure the concentration of an industry or market. It was developed by experts Orlando Wyatt Herfindahl and Albert O. Hirschman in the 1950s.

The HHI is calculated by summing the squares of the market share of each firm in a particular industry or market. The formula is as follows: HHI = Σ (market share)^2. The result is then multiplied by one million to provide a numerical value.

The HHI is used as an indicator of market concentration, which is the degree to which a given industry or market is dominated by a small number of companies. The values obtained from the HHI are typically categorized into three ranges:

* Low concentration: An HHI value of less than 1,500 is considered a low concentration of the market.

* Moderate concentration: An HHI value between 1,500 and 2,500 indicates a moderate level of market concentration.

* High concentration: An HHI value above 2,500 is considered a high level of market concentration.

Regulatory agencies, such as the Federal Trade Commission (FTC) in the United States, have established general guidelines for market concentration using the HHI. In the United States, for example, an HHI value above 2,500 is considered to be a high concentration of the market, and is subject to closer scrutiny when considering mergers or acquisitions.

The HHI is a useful tool for analyzing market structure, identifying potential antitrust issues, and predicting the effects of changes in market conditions. However, it does have some limitations, including the potential for manipulation and the difficulty of applying the index to non-minimal-product-differentiation markets.