Herfindahl–Hirschman Index (HHI): Market Concentration Metric
The Herfindahl–Hirschman Index (HHI) quantifies market concentration by summing the squared market shares of firms in an industry or portfolio. Regulators, investors, and procurement teams rely on it to detect monopoly risk, evaluate mergers, and manage supplier diversity.
Use this article alongside the Gini coefficient guide and profitability calculators such as the net profit margin tool to build concentration analyses that tie directly to financial performance.
Definition and Calculation
For an industry with N firms and market shares sᵢ expressed as percentages, the Herfindahl–Hirschman Index is HHI = Σ (sᵢ)². Market shares may be measured by revenue, units sold, capacity, or another relevant quantity. Because shares sum to 100%, HHI ranges from 0 to 10,000 when shares are in percentage points, or from 0 to 1 when expressed as fractions.
A perfectly competitive market with many small firms yields a low HHI near zero. A monopoly, where one firm holds 100% share, produces an HHI of 10,000 (or 1.0). Antitrust agencies in the United States, including the Department of Justice (DOJ) and Federal Trade Commission (FTC), classify markets with HHI below 1,500 as unconcentrated, between 1,500 and 2,500 as moderately concentrated, and above 2,500 as highly concentrated. Changes in HHI following a merger help regulators assess potential reductions in competition.
When data include many small firms, analysts often group residual shares into an “other” category to simplify reporting. However, for accurate HHI computation, retain as much granularity as possible—squaring small shares emphasises dominant firms, so omitting minor players has limited effect but should still be documented.
Historical Background
Economist Orris C. Herfindahl introduced the concentration index in the 1950s while studying the U.S. electric power industry. Economist Albert O. Hirschman independently developed a similar measure around the same time, examining international trade concentration. Their work built on earlier concentration ratios but provided a smoother, more mathematically tractable indicator by squaring shares instead of taking only the top four or eight firms.
The 1982 U.S. Merger Guidelines cemented the HHI’s role in antitrust enforcement, specifying thresholds for regulatory scrutiny. Subsequent updates refined these thresholds but maintained the index as a cornerstone metric. Internationally, competition authorities in the European Union, Canada, India, and many other jurisdictions reference HHI when reviewing mergers or dominant-firm behaviour.
Beyond antitrust, the HHI has permeated finance, procurement, and risk management. Bank regulators monitor loan portfolio HHIs to prevent overexposure to single industries or borrowers. Supply-chain professionals apply the index to supplier spend shares, flagging categories where diversification is needed to mitigate disruption risk.
Conceptual Insights
Squaring shares means the index weights dominant firms disproportionately. A firm with 40% share contributes 1,600 points to HHI, while four firms with 10% share each contribute only 400 points collectively. This property captures both market share level and distribution shape, aligning with skewness analysis for market shares.
HHI relates mathematically to variance: if market shares are expressed as fractions that sum to 1, then HHI = Σ sᵢ² equals the second moment about zero. The index therefore connects to measures like the Simpson diversity index used in ecology and the concentration index in finance.
Analysts can decompose HHI by segment, geography, or product line. Weighted averages of segment-level HHIs, using segment revenue shares as weights, yield corporate-level concentration metrics. This decomposition mirrors portfolio variance analysis and helps strategists identify where diversification efforts will have the greatest impact.
Data Preparation and Practical Computation
Begin with reliable market share data. For public companies, regulatory filings, analyst reports, and industry surveys provide share estimates. Internal dashboards may calculate shares from ERP or CRM systems; ensure consistent definitions of revenue, units, or customer counts across business units.
Clean data for double-counting (e.g., subsidiaries rolled into parent companies) and adjust for geographic differences when necessary. For supply chains, align spend classifications across procurement systems before aggregating to supplier level. Document currency conversions, time periods, and any smoothing applied to handle seasonality.
Automate HHI calculations in spreadsheets or analytics platforms. Sorting firms by share and squaring each percentage requires minimal computation, but version control and audit trails are essential. Integrate HHI scripts into business intelligence tools so dashboards refresh automatically alongside profitability metrics like those from the operating profit margin calculator.
Applications
Merger analysis. Competition authorities evaluate pre- and post-merger HHIs to decide whether a transaction diminishes competition. Significant HHI increases (often ≥ 100–200 points) in already concentrated markets trigger detailed review or structural remedies.
Banking and credit risk. Regulators and risk managers calculate HHI across loan portfolios to ensure exposures are diversified across sectors, borrowers, and regions. High HHIs indicate potential vulnerability to sector-specific downturns and may influence capital requirements.
Supply-chain resilience. Procurement teams track HHI for categories such as semiconductors, logistics providers, or critical raw materials. Rising concentration signals dependence on a few suppliers, prompting dual-sourcing strategies or strategic stockpiles.
Telecommunications and energy. Infrastructure regulators analyse HHI for spectrum allocation, broadband coverage, or electricity generation to ensure competitive pricing and reliability.
Digital platforms. App stores, advertising networks, and cloud services frequently use HHI to evaluate developer or advertiser diversity, guiding incentive programmes that maintain healthy ecosystems.
Communicating HHI Findings
Present HHI values alongside companion metrics: top-four concentration ratios, market share tables, and profitability indicators. Visualising HHI trends over time helps stakeholders understand whether market power is consolidating or fragmenting.
Translate thresholds into qualitative categories—unconcentrated, moderate, or high concentration—and explain regulatory implications. When a merger raises HHI by 300 points in a moderately concentrated market, clarify the potential for heightened scrutiny and required remedies.
Provide methodological notes: data sources, time periods, share definitions, and any adjustments. Consistency ensures comparability across industries and reporting cycles.
Governance and Best Practices
Embed HHI monitoring into corporate strategy, risk committees, and ESG reporting. Establish thresholds that trigger management action, such as supplier diversification plans or portfolio rebalancing.
Maintain documentation, including calculation templates, change logs, and scenario analyses. During audits or regulatory inquiries, be prepared to reproduce HHI calculations rapidly and demonstrate alignment with published guidelines.
Pair HHI with complementary analyses, such as the Gini coefficient or skewness assessments, to capture nuances in distribution shape beyond raw concentration.
Why the HHI Matters
The Herfindahl–Hirschman Index transforms complex competitive landscapes into an actionable score grounded in regulatory precedent. By monitoring HHI, organisations anticipate antitrust scrutiny, strengthen supply chains, and design strategies that balance efficiency with resilience. Integrating the metric into regular analytics, alongside profitability and risk calculators, ensures concentration insights lead to timely, data-driven decisions.
Continue refining your concentration toolkit by combining HHI with the calculators and measurement explainers linked here, and document every assumption so collaborators and regulators can validate your findings.