HHI Calculator

What is the Herfindahl-Hirschman Index (HHI)?

The Herfindahl-Hirschman Index (HHI) is a standard measure of market concentration used by economists, regulators, and antitrust authorities. It quantifies the distribution of market share among firms in a given industry. A higher HHI indicates a more concentrated market with less competition, while a lower HHI suggests a more fragmented, competitive market.

The index is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. The result can range from close to zero (in a market with many very small firms) to 10,000 (in a pure monopoly).

How the HHI is Calculated

The formula for the HHI is straightforward:

HHI = s₁² + s₂² + s₃² + ... + sₙ²

Where s represents the market share of each individual firm, expressed as a whole number (e.g., 30 for 30%).

For example, in a market with four firms holding market shares of 40%, 30%, 20%, and 10%, the calculation would be:

HHI = 40² + 30² + 20² + 10² = 1600 + 900 + 400 + 100 = 3,000

Interpreting HHI Results

Regulatory agencies like the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) use the following general thresholds to evaluate market concentration:

These thresholds are guidelines. Actual regulatory decisions consider additional factors such as market dynamics, barriers to entry, and historical trends.

Common Mistakes When Using the HHI

• Using percentages as decimals: Market shares must be entered as whole numbers (e.g., 25 for 25%), not as 0.25. Using decimals will produce an incorrect, artificially low result.
• Omitting small firms: The HHI is sensitive to the number of firms. Excluding small competitors, even those with shares below 1%, can significantly skew the index.
• Misinterpreting the scale: The maximum HHI is 10,000 (a single firm with 100% market share). A result of 5,000 does not mean the market is "halfway" to a monopoly in a linear sense.
• Ignoring market definition: The HHI is only as accurate as the market definition. A narrow or overly broad definition of the market will produce misleading results.

Practical Use Cases for the HHI

• Antitrust and merger analysis: Regulators use the HHI to evaluate whether a proposed merger would create an overly concentrated market.
• Competitive landscape assessment: Businesses use the HHI to understand their position relative to competitors and identify market power dynamics.
• Investment research: Analysts use the index to assess industry structure and potential for pricing power or regulatory risk.
• Academic research: Economists use the HHI to study market structure, competition policy, and industry evolution over time.

Limitations of the HHI

The HHI is a useful starting point but has notable limitations. It does not account for the actual competitive behavior of firms, barriers to entry, product differentiation, or the potential for new competitors to enter the market. Two markets with identical HHI scores can behave very differently depending on these qualitative factors. The index should be used as one tool in a broader competitive analysis, not as a definitive measure of market health.