Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index (HHI) is a measure of market concentration that is used to assess the competitiveness of an industry. It is calculated by summing the squares of the market shares of all firms in the industry. A higher HHI indicates a more concentrated market, while a lower HHI indicates a more competitive market.

The HHI is used by antitrust regulators to determine whether a merger or acquisition will likely result in a substantial lessening of competition. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have established a set of guidelines for evaluating mergers and acquisitions. These guidelines state that a merger or acquisition will not be challenged if the post-merger HHI is below 1,000. If the post-merger HHI is between 1,000 and 1,800, the merger or acquisition will be reviewed carefully. If the post-merger HHI is above 1,800, the merger or acquisition will be challenged unless the merging firms can demonstrate that the merger will result in significant efficiencies.

The HHI is a useful tool for assessing market concentration, but it has some limitations. First, the HHI does not take into account the size of the firms in the industry. A market with a few large firms may have a high HHI, even if the firms are not very close competitors. Second, the HHI does not take into account the potential for new entry into the market. A market with a high HHI may be competitive if there is a low barrier to entry.

Despite its limitations, the HHI is a widely used measure of market concentration. It is a simple and easy-to-calculate measure that can provide a useful overview of the competitive landscape of an industry.

The HHI is also used by investors to assess the potential for future returns. A market with a high HHI is likely to be less competitive and may offer lower returns. A market with a low HHI is likely to be more competitive and may offer higher returns.

The HHI is a valuable tool for both antitrust regulators and investors. It can be used to assess the competitive landscape of an industry and to predict the potential for future returns.