Herfindahl-Hirschman Index - HHI

You’re only as good as the competition, and the Herfindahl-Hirschman Index knows it.

The Herfindahl-Hirschman Index (HHI) measures how concentrated a market is (the fewer firms, the more concentrated it is), and how fierce the competition is. The Herfindahl-Hirschman index is a calculation where each market participant’s proportion of market share is squared, and then added together. The higher the number (with “super-high” being 10,000), the more likely it is to be a monopolistic market.

“Super-high” is around 10,000, because if there was only one person in a market, their 100% share of the market squared (and added together...with nothing else, since they’re the only one) is 10,000. Likewise, the more competitive and diluted a market is, the closer to one it will be, since squaring the market share is less pronounced the smaller each market share bit is.

HHI is used by regulators (like the U.S. Department of Justice) to determine how concentrated markets are (above 2,500 is considered concentrated). If there’s a big merger in the works and the Herfindahl-Hirschman index increases a market by 200 as a result of that merger, the DOJ might step in and say “hey guys, you can’t do that, because of antitrust laws” to keep competition up and protect consumers.