Herfindahl-Hirschman Index (HHI)

Definition

The Herfindahl-Hirschman Index (HHI) is a measure used to assess market concentration and competition, calculated by summing the squares of the market shares of all firms in a market. A higher HHI indicates a more concentrated market, which can raise antitrust concerns during media mergers. It helps regulators evaluate the competitive impact of mergers by providing insight into how much control a few firms have in the market.

5 Must Know Facts For Your Next Test

1. The HHI ranges from 0 to 10,000, where 0 represents a perfectly competitive market and 10,000 indicates a monopoly.
2. A market with an HHI below 1,500 is generally considered to be competitive, while markets with an HHI between 1,500 and 2,500 are moderately concentrated.
3. If the HHI exceeds 2,500, it raises concerns for antitrust regulators about potential anti-competitive behavior.
4. Regulators often use the HHI to evaluate the impact of proposed mergers in media sectors, determining if they could significantly reduce competition.
5. Changes in the HHI are closely monitored after mergers, as increases can indicate reduced competition and may trigger further scrutiny from regulatory bodies.

Review Questions

• How does the Herfindahl-Hirschman Index help regulators assess the competitiveness of a market?
  • The Herfindahl-Hirschman Index provides a quantitative measure of market concentration by summing the squares of each firm's market share. By analyzing this index, regulators can determine if a market is competitive or if it has become overly concentrated due to mergers. If the HHI is high, it suggests that a few firms dominate the market, raising potential antitrust concerns that need to be addressed before approving any mergers.
• Discuss how the HHI is used specifically in evaluating media mergers and its implications for market competition.
  • In evaluating media mergers, the HHI serves as a key tool for understanding how combined entities may affect competition within the industry. By calculating the HHI before and after a merger, regulators can see if the merger would lead to increased concentration that might harm consumers through reduced choice or higher prices. A significant increase in HHI could trigger further investigations into whether the merger would violate antitrust laws aimed at preserving healthy competition in media markets.
• Evaluate the significance of HHI thresholds in determining antitrust actions against proposed media mergers.
  • The significance of HHI thresholds lies in their ability to guide antitrust actions against proposed media mergers. An HHI below 1,500 suggests a competitive environment with minimal regulatory concern, while thresholds between 1,500 and 2,500 indicate moderate concentration that warrants scrutiny. When the HHI exceeds 2,500, antitrust authorities may take more aggressive action, potentially blocking the merger or imposing conditions to mitigate anti-competitive effects. This structured approach allows for systematic assessments that help protect consumer interests and maintain competitive markets.

Related terms

Market Share: The percentage of an industry's sales that is earned by a particular company, used to determine a company's size relative to its market.

Antitrust Laws:

Legislation enacted to promote competition and prevent monopolistic practices, ensuring fair trading and protecting consumers.

Monopoly: A market structure where a single seller or producer controls the entire supply of a product or service, limiting competition and choice for consumers.