Herfindahl-Hirschman Index (HHI)

What Is the Herfindahl-Hirschman Index (HHI)?

The Herfindahl-Hirschman Index, or HHI, is a market concentration measure calculated by summing the squared market shares of firms in a market. It is commonly used in antitrust analysis to evaluate how concentrated a market is before and after a merger.

HHI gives more weight to large firms because market shares are squared. A market with one dominant company will have a much higher HHI than a market with many similarly sized competitors.

Formula

The basic formula is:

In this formula, s_i is firm i's market share expressed as a percentage, and N is the number of firms in the market. If shares are written as percentages, a monopoly with 100% share has an HHI of 10,000.

Example

Suppose a market has four firms with shares of 40%, 30%, 20%, and 10%. The HHI is 40² plus 30² plus 20² plus 10², or 3,000. If the 20% and 10% firms merge, the new shares become 40%, 30%, and 30%, and the HHI rises to 3,400.

That increase matters because the merger changes both the number of competitors and the distribution of market power. The index is designed to make that change visible.

Regulatory Thresholds

Under the 2023 Merger Guidelines, the DOJ and FTC describe a market with an HHI above 1,800 as highly concentrated. The guidelines also identify circumstances in which a merger that significantly increases concentration in a highly concentrated market may raise a presumption of illegality.

Thresholds are screening tools, not the whole case. Agencies also examine market definition, closeness of competition, entry barriers, buyer power, evidence of head-to-head rivalry, potential competition, efficiencies, and coordinated effects.

Why Squaring Matters

Squaring market shares makes larger firms count disproportionately. A firm with 40% share contributes 1,600 points to HHI, while four firms with 10% each contribute 400 points together. This reflects the idea that concentration risk rises when market share is held by a few large firms rather than spread across many small ones.

The same total number of firms can produce very different HHI readings. Ten firms with equal 10% shares have an HHI of 1,000. Ten firms where one has 55% and the rest are small will have a much higher index.

Limits of HHI

HHI depends on the relevant market. A narrow market definition can make concentration look high; a broad definition can make it look low. Choosing the relevant product and geographic market is often one of the hardest parts of antitrust analysis.

The index also does not fully capture product differentiation, innovation, capacity constraints, entry threats, switching costs, regulation, buyer sophistication, or platform dynamics. It is a powerful summary statistic, not a substitute for competitive analysis.

Investor and Strategy Use

Investors can use HHI-style thinking outside formal antitrust review. A company operating in a concentrated market may have more pricing power, but it may also face greater regulatory attention. A fragmented market may offer consolidation opportunities, but synergies can be harder to capture if customers have many alternatives.

Strategists use concentration analysis to understand where scale matters and where market power is fragile.

The Bottom Line

The Herfindahl-Hirschman Index measures market concentration by summing squared market shares. It helps regulators, investors, and businesses see how concentrated a market is and how much a merger may change that concentration, but it must be read with market definition and competitive evidence.