The Herfindahl-Hirschman index. Formula. Application
The Herfindahl-Hirschman index is aone of the main indicators by which it is possible to distinguish the markets of pure monopoly, oligopoly, monopoly and perfect competition. It shows how many companies are represented in a particular market segment, what is the share of their products.
Formula for determining the index
The Herfindahl-Hirschman index formula has the following form: HHI = S12+ S22+ ... + Sn2,
where S12 and S22 Is the squared percentagegoods and services of the company in a certain industry. This part is defined as the ratio of the manufacturer's sales in the market to the entire volume of goods or services in this industry. The value obtained must be in the range between 1 and 10,000. A figure of 10,000 means a complete monopolization of the economy by one company.
The Herfindahl-Hirschman index shows the levelconcentration in the industry. It should be noted that this parameter is closely related to the Lerner power monopoly coefficient. In addition, it should be emphasized that HHI is an effective indicator of changes in the market share of a company. Also, it is able to indirectly indicate the amount of economic profit obtained through the use of monopoly power.
The above formula makes it possible to delimitThe impact on HHI of the number of companies in the industry and the division of the market between them. Provided that all manufacturers control the same parts of the industry, the spread indicator will be zero. Then the value of HHI is inversely proportional to the number of companies on the market. At the same time, with a fixed number of manufacturers, HHI increases with the growth of the difference between parts of firms in the industry.
Using the index
As already mentioned, the Herfindahl-Hirschman indexindicates the level of monopolization of a certain sector of the economy. It is widely used by the US Department of Justice to analyze the forthcoming merger deals. In addition, since 1982, HHI is the basic parameter that is used in America for the implementation of the state antimonopoly policy. The fundamental advantage of the index is the ability to visually demonstrate the redistribution of parts of the industry between different companies.
The Herfindahl-Hirschman Index as a way of combating monopolies
When analyzing an index, the levelconcentration in the industry. In practice, this means that the closer the market to a monopoly, the lower the level of competition and the higher the concentration. Let us give an example. If the whole industry is occupied by one company, then HHI will be equal to 10,000, since this company has a 100% stake in the market. In this case, obviously, we are talking about monopoly.
On the other hand, if in a particular industryrepresented by a thousand companies, the market share of each of which tends to zero, then the index will also be close to zero value. This, in turn, indicates the existence of an almost perfect competition in the industry. In accordance with the methodology used by the US Department of Justice, the industry with the Herfindahl-Hirschman index less than 1000 is considered competitive. If the value of HHI is in the range between 1000 and 1800, then the market is moderately concentrated. The indicator, exceeding 1800, indicates a high concentration in the sector of the economy.
HHI and the Lerner coefficient
HHI and the Lerner coefficient are interrelated, sinceThe latter is the ratio of the Herfindahl-Hirschman index and the value of the elasticity of demand. However, this formula has one drawback. In order to accurately calculate HHI, it is necessary to know the parts on the market of all manufacturers of a particular product or service. And this, in turn, is not always possible due to their large number.
