Lesson 6 of 9
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 HHI | HHI CHANGE | GOVERNMENT RESPONSE |
|---|---|---|
| < 1,000 | Irrelevant | None. |
| 1,000 - 1,800 | ≥ 100 | Potential legal challenge to merger. |
| 1,800+ | ≥ 50 | Definite 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.