The Herfindahl Hirschman Index measures market concentration. Understanding what is herfindahl index helps investors, regulators, and businesses evaluate how competitive an industry really is.
How Do You Calculate the Herfindahl Index?
You square each firm's market share and add the results. A market with many small firms scores near zero. A monopoly scores 10,000. For example, four companies with 25 percent each yield an HHI of 2,500.
How Do Regulators Interpret HHI Scores?
The DOJ and FTC classify markets based on this index. Below 1,500 is unconcentrated. Between 1,500 and 2,500 is moderately concentrated. Above 2,500 is highly concentrated. Regulators watch both the final score and the change in HHI after a merger. Big jumps in already tight markets often signal antitrust trouble.
Where Is HHI Being Applied Today?
Beyond traditional sectors like telecom, healthcare, and tech, researchers are applying HHI to FinTech, labor markets, and emerging industries. It is becoming a broader tool to assess competition and dependence within economic systems.
What Are the Limits of the Herfindahl Index?
Its biggest weakness is market definition. A slight shift in how you define the product or geographic boundary can dramatically change the score. Because of this, regulators pair HHI with other factors such as barriers to entry and actual consumer harm.
Conclusion
Knowing what is herfindahl index helps you interpret competition with precision. While imperfect, it remains a core signal for understanding market power, merger risk, and industry structure.
