key term - Herfindahl-Hirschman Index

Definition

The Herfindahl-Hirschman Index (HHI) is a measure of market concentration that assesses the degree of competition in an industry. It is calculated by squaring the market share of each firm in the market and then summing the resulting numbers. The HHI provides insight into the level of market competition and is used in the context of corporate mergers and regulating anticompetitive behavior.

5 Must Know Facts For Your Next Test

1. The HHI ranges from 0 to 10,000, with 0 representing a perfectly competitive market and 10,000 representing a pure monopoly.
2. A higher HHI indicates a more concentrated market, suggesting less competition and a higher potential for anticompetitive behavior.
3. The U.S. Department of Justice and the Federal Trade Commission use the HHI to evaluate the potential competitive effects of mergers and acquisitions.
4. Mergers that increase the HHI by more than 200 points in highly concentrated markets (HHI above 2,500) are presumed to be anticompetitive.
5. Regulators may require divestitures or other remedies to mitigate the anticompetitive effects of a merger if the post-merger HHI exceeds certain thresholds.

Review Questions

• Explain how the Herfindahl-Hirschman Index (HHI) is calculated and how it is used to assess the level of competition in an industry.
  • The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market share of each firm in the industry and then summing the resulting numbers. The HHI ranges from 0 to 10,000, with 0 representing a perfectly competitive market and 10,000 representing a pure monopoly. A higher HHI indicates a more concentrated market, suggesting less competition and a higher potential for anticompetitive behavior. Regulators, such as the U.S. Department of Justice and the Federal Trade Commission, use the HHI to evaluate the potential competitive effects of mergers and acquisitions, and may require remedies if the post-merger HHI exceeds certain thresholds.
• Describe how the Herfindahl-Hirschman Index (HHI) is used in the context of corporate mergers and regulating anticompetitive behavior.
  • In the context of corporate mergers, the Herfindahl-Hirschman Index (HHI) is used to assess the potential impact of a merger on market concentration and competition. Mergers that increase the HHI by more than 200 points in highly concentrated markets (HHI above 2,500) are presumed to be anticompetitive. Regulators may require divestitures or other remedies to mitigate the anticompetitive effects of a merger if the post-merger HHI exceeds certain thresholds. The HHI is also used more broadly to regulate anticompetitive behavior, as a highly concentrated market with a high HHI may indicate the potential for monopolistic or oligopolistic practices that could harm consumer welfare.
• Analyze how changes in the Herfindahl-Hirschman Index (HHI) can signal shifts in the competitive landscape and the potential for anticompetitive behavior.
  • Changes in the Herfindahl-Hirschman Index (HHI) can provide valuable insights into the competitive dynamics of an industry. A decrease in the HHI may indicate an increase in competition, as the market share becomes more evenly distributed among firms. Conversely, an increase in the HHI can signal a shift towards greater market concentration, potentially signaling the emergence of monopolistic or oligopolistic behavior. Regulators closely monitor changes in the HHI, as a significant increase can be a red flag for anticompetitive practices that may harm consumer welfare. By analyzing trends in the HHI, policymakers can identify industries that require closer scrutiny and potential intervention to maintain a healthy, competitive market environment.

Related terms

Market Share: The percentage of total sales in an industry that a particular company accounts for.

Concentration Ratio:

A measure of the market share of the largest firms in an industry, typically the top 4 or 8 firms.

Monopoly:

A market structure with a single seller and many buyers, resulting in little to no competition.