Enter all but one of the squared market shares into the calculator to determine the Herfindahl Index; this calculator can also evaluate the squared market share of a firm or entity given the Herfindahl Index and the total number of firms or entities are known.
Herfindahl Index Formula
The following formula is used to calculate the Herfindahl Index:
HI = sum_{i=1}^{n} (s_i)^2Variables:
- HI is the Herfindahl Index
- n is the total number of firms or entities
- s_i is the market share of firm or entity i
To calculate the Herfindahl Index, square the market share of each firm or entity, and then sum up all the squared market shares.
What is a Herfindahl Index?
The Herfindahl Index, also known as the Herfindahl-Hirschman Index (HHI), is a measure of market concentration and competition among firms within an industry. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. The index ranges from 0 to 10,000, with higher values indicating a higher level of market concentration and, therefore less competition. For example, if there is only one firm in the market, the index would be 10,000, indicating a monopoly. Conversely, if there are a large number of firms with relatively equal market shares, the index would be close to zero, indicating a highly competitive market. The Herfindahl Index is commonly used by antitrust authorities to evaluate the potential competitive effects of mergers and acquisitions.
How to Calculate Herfindahl Index?
The following steps outline how to calculate the Herfindahl Index.
- First, gather the market shares of all firms in the industry.
- Next, square each market share.
- Next, sum up all the squared market shares.
- Finally, multiply the sum by 10,000 to get the Herfindahl Index.
Example Problem:
Use the following market shares as an example problem to test your knowledge.
Market Share of Firm A = 0.3
Market Share of Firm B = 0.2
Market Share of Firm C = 0.1
Market Share of Firm D = 0.4
Market Share of Firm E = 0.0
Market Share of Firm F = 0.0
Market Share of Firm G = 0.0
Market Share of Firm H = 0.0
Market Share of Firm I = 0.0
Market Share of Firm J = 0.0
