HHI Calculator - Herfindahl-Hirschman Index Calculator

What is the HHI (Herfindahl-Hirschman Index)?

The Herfindahl-Hirschman Index (HHI) is a widely-used measure of market concentration that indicates the level of competition within an industry. Named after economists Orris C. Herfindahl and Albert O. Hirschman, the HHI is calculated by summing the squares of the market share percentages of all firms in a market.

The HHI is the primary measure used by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) to evaluate the competitive effects of mergers and acquisitions. It provides a single number that reflects both the number of firms in a market and the distribution of their market shares.

Key Insight: The HHI ranges from close to 0 (perfect competition with many small firms) to 10,000 (a pure monopoly where one firm has 100% market share). By squaring the market shares, the index gives proportionally greater weight to larger firms.

How to Calculate HHI

The HHI formula is straightforward:

HHI = S₁² + S₂² + S₃² + ... + Sₙ²

Where S₁, S₂, S₃, etc. are the market share percentages of each firm. Note that you use the percentage value directly (not the decimal), so a 30% market share is entered as 30, not 0.30.

Example Calculation

Consider a market with four companies:

Company A: 40% market share
Company B: 30% market share
Company C: 20% market share
Company D: 10% market share

HHI = 40² + 30² + 20² + 10² = 1,600 + 900 + 400 + 100 = 3,000

This market would be classified as moderately concentrated.

HHI Thresholds and Interpretation

The U.S. DOJ and FTC use these thresholds to classify market concentration:

Unconcentrated Market

HHI < 1,500

Competitive market with many participants. Mergers typically raise no concerns.

Moderately Concentrated

1,500 - 2,500

Some concentration exists. Mergers that increase HHI by 100+ may warrant scrutiny.

Highly Concentrated

HHI > 2,500

Significant market power. Mergers likely to face regulatory review.

HHI Usage in Antitrust Analysis

Merger Guidelines

When evaluating mergers, regulators look at both the post-merger HHI level and the change in HHI (ΔHHI):

ΔHHI < 100: Unlikely to raise competitive concerns regardless of concentration level
ΔHHI 100-200 in moderately concentrated markets: May warrant scrutiny
ΔHHI > 200 in highly concentrated markets: Presumed to be likely to enhance market power

Calculating Merger Impact

For a merger between two firms, the change in HHI can be calculated simply as:

ΔHHI = 2 × S₁ × S₂

Where S₁ and S₂ are the market shares of the merging firms. For example, if a firm with 20% market share merges with a firm with 15% market share: ΔHHI = 2 × 20 × 15 = 600 points.

HHI vs. Concentration Ratio

While the concentration ratio (CR) measures the combined market share of the top firms (e.g., CR4 for top 4 firms), the HHI has several advantages:

Reflects distribution: HHI accounts for the relative sizes of all firms, not just the largest
Sensitive to inequality: Markets with similar CR4 can have very different HHI values
Mathematical properties: HHI has useful mathematical properties for merger analysis
Regulatory acceptance: HHI is the standard measure used by antitrust authorities

Limitations of HHI

Market definition: HHI accuracy depends on correctly defining the relevant market
Static measure: Doesn't capture dynamic competition or potential entry
Geographic considerations: National HHI may not reflect local market conditions
Product differentiation: Doesn't account for differences in products within a market
Barriers to entry: A high HHI with low barriers may still be competitive

Industry Examples

Industry	Typical HHI Range	Concentration Level
Restaurants	200 - 500	Very Low
Retail Banking (Local)	1,000 - 2,000	Low to Moderate
Wireless Carriers	2,500 - 3,500	High
Operating Systems	4,000 - 6,000	Very High
Search Engines	6,000 - 8,000	Near Monopoly

Frequently Asked Questions

What is a "good" HHI value?

There's no universally "good" HHI - it depends on context. For consumers and regulators, a lower HHI (below 1,500) generally indicates a competitive market with more choices and potentially lower prices. For businesses, the optimal HHI depends on their market position and strategy. Some concentration may be efficient, while too much may attract regulatory attention.

How is HHI used in merger reviews?

Antitrust authorities calculate both the post-merger HHI and the change in HHI. If the post-merger HHI exceeds 2,500 and the merger increases HHI by more than 200 points, it's presumed to enhance market power. However, this is just a starting point - authorities also consider other factors like entry barriers, efficiencies, and market dynamics.

Can HHI be negative?

No, HHI cannot be negative because it's calculated by summing squared values, which are always positive. The minimum HHI approaches 0 as the number of equal-sized firms approaches infinity. The maximum is 10,000 (100² = 10,000) for a pure monopoly.

What's the difference between HHI calculated with percentages vs. decimals?

The standard HHI uses percentage values (30% = 30), producing values from 0 to 10,000. Some academic literature uses decimal form (30% = 0.30), producing values from 0 to 1. The concepts are identical - just multiply the decimal-based HHI by 10,000 to convert. Our calculator uses the standard percentage-based approach.

What is the equivalent number of firms for an HHI value?

The "numbers equivalent" is calculated as 10,000 / HHI. It represents how many equal-sized firms would produce that HHI. For example, an HHI of 2,500 is equivalent to 4 equal-sized firms (10,000 / 2,500 = 4). This helps contextualize the concentration level in intuitive terms.