What is the Hirfindahl-Hirschman Index?
A: The Hirfindahl-Hirschman Index, or HHI, is the standard measure used by economists to evaluate market concentration. The greater the level of concentration among competitors, the higher the HHI. The HHI runs on a scale from zero (representing extreme competitiveness) to 10,000 (representing monopoly). The HHI is determined by squaring (multiplying by itself) the market share of each firm in a market, and then adding up the results. The example below illustrates this calculation.
Example Calculation for a Hypothetical Market With HHI of 2,000
|
Competitor
|
Market Share %
|
HHI
|
|
Bank #1
|
29
|
841
|
|
Bank #2
|
24
|
576
|
|
Bank # 3
|
19
|
361
|
|
Bank # 4
|
10
|
100
|
|
Bank # 5
|
10
|
100
|
|
Bank # 6
|
4
|
16
|
|
Bank # 7
|
2
|
4
|
|
Bank # 8
|
1
|
1
|
|
Bank # 9
|
1
|
1
|
|
Total Market
|
100
|
2,000
|
(Hirfindahl-Hirschman Index Source: Federal Reserve)