how to calculate the herfindahl hirschman index hhi
How to Calculate the Herfindahl-Hirschman Index (HHI)
The Herfindahl-Hirschman Index (HHI) is a measure of the competition between firms and related industries. Buzzle will tell you how to calculate the Herfindahl-Hirschman Index (HHI).
Steps to Calculate
Step I
Find out the value of 'N'. Consider the number of firms that are involved in the market share. Generally, the industry's largest 50 firms are considered.
Step II
Determine the market share of every firm.
Step III
Calculate the square of every value, i.e., every market share. If there are 5 firms involved, you need to find the square of every market share percentage and have 5 results in hand.
Step IV
Add all the squares together. This is your HHI value.
Examples
Example I
- Assume there are 5 stores: A, B, C, D, and E.
- Assume that their market share percentages are 40%, 15%, 15%, 10%, and 20%, respectively.
- Considering the formula, the HHI calculation will be as follows:
Example II
Consider 10 firms with unequal market shares.
| Firm | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Market Share | 10 | 25 | 5 | 8 | 7 | 5 | 10 | 15 | 5 | 10 |
Calculation of HHI using MS Excel and Stata
- You can learn how to calculate the Herfindahl index in Excel.
- You can create a data table that takes input data from the user or imports data from another file (use the important option).
- The squares of the market share percentage values can be calculated separately using the 'Function wizard'.
- These values can be entered separately into the other cells, whose sum can be calculated using the 'Autosum' feature.
- Stata is a statistical software. It contains inbuilt modules that can help compute the HHI.
Some Vital Points
- The HHI value is very important to analyze how the market power can be enhanced.
- Since the different values signify different levels of market concentration, we will understand when and where the firm needs to improve or slow down or retain the current scenario.
- Experts state that if the HHI value increases by more than 200 points during mergers in a moderately concentrated market, it gives rise to an antitrust environment. It is believed that the merged company will reduce competition.
- The geographical location plays an important role while determining the HHI. It gives a clearer view regarding the perfectly competitive vs. monopoly market.
- A monopoly will have the maximum HHI value, since it has almost 100% of the company's market share.