Herfindahl–Hirschman Index
Abbreviation: HHI. Also known as: market concentration, Herfindahl index.
A measure of market concentration: the sum of the squared market shares, in percent, of all sellers. It rises sharply when a few sellers dominate.
Synthetic dataExamples on this page use synthetic data created for illustration.
Definition
The Herfindahl–Hirschman Index measures how concentrated a market is: the sum of the squared market shares, in percent, of all sellers. It runs from near zero for many tiny sellers to 10,000 for a monopoly, and rises sharply when a few sellers dominate.
In plain terms
Squaring the shares gives big sellers much more weight than small ones, so the index separates “four equal competitors” from “one giant and three small ones” even though both have four sellers. Competition authorities use it, with guideline levels that differ between agencies and have been revised over time.
The index is only as good as the shares fed into it. If shares are computed from a partial list, such as a top-100 ranking, they are shares of that list and say little about the market (see Sampling Frame).
Example
Three synthetic markets:
| Market | Sellers and shares | HHI |
|---|---|---|
| A | 4 sellers at 25% each | 4 × 25² = 2,500 |
| B | 1 seller at 70% and 3 at 10% each | 70² + 3 × 10² = 5,200 |
| C | 100 sellers at 1% each | 100 × 1² = 100 |
A and B both have four sellers, but B is far more concentrated, and the index shows it.
Common misunderstandings
- “HHI is the number of competitors.” It depends on how sales are shared, not only on how many sellers there are.
- “Shares among the top 100 listings are market shares.” They are shares of the observed list.
- “One threshold tells you a market is dominated.” Guideline levels differ by authority and over time; use them as a rough aid.
References
- Herfindahl-Hirschman Index . U.S. Department of Justice, Antitrust Division.
- Jean Tirole. The Theory of Industrial Organization . MIT Press, 1988. ISBN 978-0262200714.