What is the hirfindahl-hirschman index, Corporate Finance

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What is the Hirfindahl-Hirschman Index?

A:
The Hirfindahl-Hirschman Index, or HHI, is the standard measure used by economists to evaluate market concentration. The greater the level of concentration among competitors, the higher the HHI. The HHI runs on a scale from zero (representing extreme competitiveness) to 10,000 (representing monopoly). The HHI is determined by squaring (multiplying by itself) the market share of each firm in a market, and then adding up the results. The example below illustrates this calculation.

Example Calculation for a Hypothetical Market With HHI of 2,000

Competitor

Market Share %

HHI

Bank #1

29

841

Bank #2

24

576

Bank # 3

19

361

Bank # 4

10

100

Bank # 5

10

100

Bank # 6

4

16

Bank # 7

2

4

Bank # 8

1

1

Bank # 9

1

1

Total Market

100

2,000

(Hirfindahl-Hirschman Index Source: Federal Reserve)

 

 


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