Corporate Finance

Herfindahl-Hirschman Index (HHI)

  • HHI measures market concentration and is a metric used by government oversight bodies in the U.S. to determine if a merger should be allowed or blocked.
  • HHI calculates the sum of squared market shares for competing companies.

HHI = ∑ ((Sales firm i / Sales Market) * 100)) 2

  • For an individual firm, HHI is calculated once; for a merger of two companies the HHI of the combined entity will be the sum of their individual market share HHI values.
  • When HHI crosses a certain threshold, the government may legally challenge the proposed merger.
COMBINED ENTITY HHIHHI CHANGEGOVERNMENT RESPONSE
< 1,000IrrelevantNone.
1,000 - 1,800≥ 100Potential legal challenge to merger.
1,800+≥ 50Definite government challenge to merger.
  • Note that a small change to HHI in a heavily concentrated industry may be more scrutinized than a large change to HHI in a highly competitive industry.
  • In the U.S., the Justice Department will consider other factors that just the HHI, when determining whether or not to attempt to block a merger.
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