Herfindahl-Hirschman (HHI) index calculator
About this calculator?
The Herfindahl-Hirschman Index, also known as ‘HHI’’ is a common measurement of market concentration that may be used to assess market competitiveness, which is typically used to gauge market competitiveness prior to and after merger and acquisition (M&A). Most countries may have a version of laws or rules that regulate the conduct and organization of businesses and are generally intended to promote competition and prevent monopolies. These help to install economic ideas of market concentration and market competitiveness. HHI has ease of computation and only requires a short quantity of data. The HHI is also preferable to other metrics like the concentration ratio since businesses are weighted according to their size.
The Herfindahl-Hirschman Index is derived from the names of the two economists who created and popularized it, Orris Herfindahl and Albert Hirschman. HHI is defined as the total of all businesses market shares, represented as a percentage, in a certain market, branch of industry after these have been squared. The result of HHI may be anything between 0 and 10,000.
HHI usage and insights
The more concentrated a market gets, the closer it is to becoming a monopoly. In terms of HHI, this indicates that high index values imply a monopolized industry, whilst low index values suggest a highly competitive market. As an example, if a business has 100% market share then the HHI would indicate high market concentration. Otherwise, if there were hundreds of small businesses in the market then the HHI would be around 0 as each business has an approximate 1% market share. It is generally agreed that:
HHI below 100 indicates a highly competitive industry.
HHI between 100 and 1,500 indicates an unconcentrated industry.
HHI between 1,500 to 2,500 indicates moderate market concentration.
HHI above 2,500 indicates high market concentration.
HHI is a straightforward metric to use when assessing market competitiveness. The benefit of employing this indicator is that it just requires a minimal amount of data and is reasonably straightforward to calculate. The fundamental drawback of HHI, on the other hand, is that it is unable to account for all of the complexity inside a market.
The end-goal.
The end-goal of utilising this calculator is to allow you to identify if your business is entering or already existing within a highly competitive or highly concentrated market. Allowing you to assume how best to approach business, marketing, financial and management practices for your business.
Necessary terms.
Business Percentage (Market Shares): This is the percentage of the total revenue or sales in a market that a business fulfils.
Total Percentage (Market Shares): This is the complete percentage of the total revenue or sales in a market that all competing businesses fulfil.
HHI: An abbreviation of ‘Herifindahl-Hirschman Index’ referring to an index that measures the market concentration of the industry.
HHI Indication: This is a valuation of the HHI rating that ranges from 1, least concentrated, to 10,000, most concentrated.
The formula.
Total Percentage
Total Percentage: TP
Business Percentage 1: BP1
Business Percentage 2: BP2
Business Percentage 3: BP3
Business Percentage 4: BP4
Business Percentage 5: BP5
Business Percentage 6: BP6
Business Percentage 7: BP7
Business Percentage 8: BP8
Business Percentage 9: BP9
Business Percentage 10: BP10
TP = BP1 + BP2 + BP3 + BP4 + BP5 + BP6 + BP7 + BP8 + BP9 + BP10
Herfindahl-Hirschman Index
Herfindahl-Hirschman Index: HHI
Business Percentage 1: BP1
Business Percentage 2: BP2
Business Percentage 3: BP3
Business Percentage 4: BP4
Business Percentage 5: BP5
Business Percentage 6: BP6
Business Percentage 7: BP7
Business Percentage 8: BP8
Business Percentage 9: BP9
Business Percentage 10: BP10
HHI = BP1^2 + BP2^2 + BP3^2 + BP4^2 + BP5^2 + BP6^2 + BP7^2 + BP8^2 + BP9^2 + BP10^2
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