What does the Herfindahl-Hirschman Index measure? How is it calculated?
The Herfindahl-Hirschman (HHI) Index measures industry concentration. It is calculated by taking the market shares (s) of every firm in the industry, squaring them, and adding them up to get a total:
HHI = s12 + s22 + s32 + … + sn2, where n is the number of firms in the industry.
If an industry is dominated by a monopoly, then the HHI would reach its maximum value of 1002 = 100,000 . For an extremely competitive industry, with dozens or hundreds of extremely small competitors, the value of the HHI might drop as low as 100 or even less. For example, if an industry has 100 firms that each have 1% of the market, then the HHI is 100 × (12) = 100.
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