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The Herfindahl index (also known as Herfindahl–Hirschman Index, HHI, or sometimes HHI-score) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also technology management. It is defined as the sum of the squares of the market shares of the firms within the industry (sometimes limited to the 50 largest firms), where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer. Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Alternatively, if whole percentages are used, the index ranges from 0 to 10,000 "points". For example, an index of .25 is the same as 2,500 points. The major benefit of the Herfindahl index in relationship to such measures as the concentration ratio is that it gives more weight to larger firms. The measure is essentially equivalent to the Simpson diversity index, which is a diversity index used in ecology; the inverse participation ratio (IPR) in physics; and the effective number of parties index in politics.
References
- 2010 Merger Guidelines § 5.3
- However, it gets far more complicated than that. See para. 16-21 Guidelines on horizontal mergers
- "Horizontal Merger Guidelines (08/19/2010)". http://www.justice.gov/atr/public/guidelines/hmg-2010.html.
- "Herfindahl–Hirschman Index". USDOJ. http://www.justice.gov/atr/public/guidelines/hhi.html. Retrieved 4 May 2012.
- Saxena, Nidhi (2011-04-26). "Herfindal Hirschman Index". Essays For Student.com. https://www.essaysforstudent.com/term-paper/Herfindal-Hirschman-Index/94112.html. Retrieved 2016-03-28. "If all firms have equal share the reciprocal of the index shows the number of firms in the industry. When the firms have unequal share the reciprocal of the index indicates the equivalent number of firms in the industry"
- Lovett, William (1988). Banking and Financial Institutions Law in a Nutshell. West Publishing Co..
- Bouchaud, Jean-Philippe; Potters, Aguilar (1997). Missing Information and Asset Allocation. https://arxiv.org/pdf/cond-mat/9707042.pdf.
- Woerheide, Walt; Persson, Don (1993). "An Index of Portfolio Diversification". FINANCIAL SERVICES REVIEW 2 (2): 73–85. https://pdfs.semanticscholar.org/0a5e/ec924dae3ea30b6cae8e66f7070344d47631.pdf.
