- 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 – 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.