What is the Herfindahl Index?
The Herfindahl Index (HI) is an economic measure of market concentration. It is also known as the Herfindahl–Hirschman Index (HHI) and is used in antitrust (or competition) law to measure the degree of market concentration. It is calculated by summing the squares of the market shares of each firm in the market.
How is the Herfindahl Index Calculated?
The Herfindahl Index is calculated by adding the squares of the market shares of each firm in the market. For example, if a market consists of four firms with market shares of 25%, 25%, 25%, and 25%, the Herfindahl Index would be calculated as: HI = (0.25 x 0.25) + (0.25 x 0.25) + (0.25 x 0.25) + (0.25 x 0.25) = 0.25 The higher the Herfindahl Index, the more concentrated the market is. For example, if the market consists of three firms with market shares of 50%, 30%, and 20%, the Herfindahl Index would be calculated as: HI = (0.50 x 0.50) + (0.30 x 0.30) + (0.20 x 0.20) = 0.80
What Does the Herfindahl Index Measure?
The Herfindahl Index measures the degree of market concentration by calculating the sum of the squares of the market shares of each firm in the market. The higher the Herfindahl Index, the more concentrated the market is.
Examples of Herfindahl Index
- Monopolistic Market: In a monopolistic market, where one firm controls the entire market, the Herfindahl Index would be 1 (100% squared).
- Oligopolistic Market: In an oligopolistic market, where two firms control the majority of the market, the Herfindahl Index would be 0.9 (90% squared).
- Competitive Market: In a competitive market, where four firms each control 25% of the market, the Herfindahl Index would be 0.25 (25% squared).
Conclusion
The Herfindahl Index is an economic measure of market concentration. It is used to measure the degree of market concentration by calculating the sum of the squares of the market shares of each firm in the market. The higher the Herfindahl Index, the more concentrated the market is. For more information about the Herfindahl Index, please see the following resources: