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The Herfindhal-Hirschman Index, (HHI) is a measure of market concentration and competition among market participants.  The formula for calculating HHI is to square each market participant’s market share, and then sum those squared numbers.  Based on this formula, the resulting number ranges from close to 1 to a maximum of 10,000.

When the number is close to 10,000, this indicates a highly concentrated, monopolist market.  For instance, if there were only one market participant with 100% of the market, the square of that 100% would be 10,000. A HHI number close to 1 indicates a lot of small, equally-sized market participants in a very competitive market.

The formula is useful because squaring all of the percentages gives greater weight to market participants that have a large share of the market.

As an example, assume a market with eight participants as follows:

 Participant Market Share Square A 10% 100 B 9% 81 C 12% 144 D 15% 225 E 12% 144 F 11% 121 G 15% 225 H 16% 256 100% 1,296

According to the United States Justice department, this HHI index of 1,296 indicates there is not much market concentration.  The Justice Department considers an HHI score from 1,500 to 2,500 to indicate a moderately concentrated market.  A score above 2,500 is a concentrated market.

In evaluating mergers, the Antitrust Division of the Justice Department considers that any merger or transaction that increases the HHI by 200 is a significant market power enhancement, and thus may create antitrust concerns.

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