Herfindahl–Hirschman Index

Herfindahl–Hirschman Index
Name	Herfindahl–Hirschman Index
Acronyms	HHI
Field	Industrial organization
Introduced	1950s
Related	Concentration ratio

Herfindahl–Hirschman Index is a quantitative measure used to assess market concentration and competitive structure in industrial organization, frequently employed by agencies such as the United States Department of Justice, the Federal Trade Commission, and regional regulators like the European Commission. Policymakers in jurisdictions including the United Kingdom, Canada, and Australia reference it alongside alternatives like the Concentration ratio, while scholars at institutions such as Harvard University, Massachusetts Institute of Technology, and the London School of Economics analyze its properties.

Definition and formula

The index is defined as the sum of the squares of market shares of all firms in an industry; formal derivations appear in texts from scholars linked to Edward Chamberlin, Joan Robinson, and later treatments in journals where authors from University of Chicago, Stanford University, and Yale University contribute. In practice regulators at the Department of Justice and the Federal Trade Commission compute a scaled variant to fit thresholds originating in guidance influenced by economists associated with Chicago School of Economics and critiques from researchers at Cornell University and Columbia University. The formula is algebraically simple yet connects to statistical measures used in works by researchers at the National Bureau of Economic Research, the Brookings Institution, and the Peterson Institute for International Economics.

Properties and interpretation

The index is bounded and interpretable across extreme cases familiar from historical market studies such as those by analysts of the Bell System breakup and antitrust cases involving firms like Microsoft Corporation and AT&T. It attains a minimum in the case of many equal-sized firms—discussions reference theoretical results found in treatises by economists at Princeton University and Yale University—and a maximum when a single firm holds the entire market, a scenario analyzed in litigation involving Standard Oil, United States v. Microsoft Corp., and regulatory reviews by the European Commission. Comparative interpretation often invokes benchmarks used by the Federal Trade Commission and the United States Department of Justice alongside critiques from scholars affiliated with the American Enterprise Institute and the Institute for Fiscal Studies.

Calculation and examples

Computing the index for real-world industries draws on datasets maintained by entities such as the U.S. Census Bureau, Eurostat, and the Organisation for Economic Co-operation and Development, with empirical studies by teams at Johns Hopkins University, University of California, Berkeley, and New York University. Example calculations in merger reviews—such as cases involving Comcast Corporation, The Walt Disney Company, and AT&T Inc.—appear in filings with the Federal Communications Commission and were examined in academic articles from Columbia Business School and INSEAD. Applied researchers often convert market shares reported by Bloomberg L.P.,[ [Thomson Reuters, and S&P Global into squared-share sums to produce index values that inform reports by think tanks like the Rand Corporation and the Aspen Institute.

Applications in antitrust and regulation

Regulators at the Federal Trade Commission, the Department of Justice, and the European Commission use the index to screen mergers in sectors ranging from telecommunications—subject to review by the Federal Communications Commission—to energy markets overseen by bodies like the European Network of Transmission System Operators for Electricity and the U.S. Energy Information Administration. Antitrust cases against firms such as AT&T Inc., Comcast Corporation, Time Warner, and Oracle Corporation have referenced concentration metrics in pleadings filed in courts like the United States District Court for the District of Columbia and tribunals such as the Court of Justice of the European Union. Competition policy discourse involving institutions like the Organisation for Economic Co-operation and Development and the World Bank frequently pairs the index with structural presumptions evident in rulings related to the Breakup of Standard Oil and the Microsoft antitrust case.

Limitations and criticisms

Critiques from scholars at Harvard Kennedy School, Massachusetts Institute of Technology, and Princeton University highlight limitations when assessing dynamic competition in markets influenced by firms such as Google LLC, Facebook, Inc., and Amazon.com, Inc., where factors like network effects examined in literature associated with Stanford University and University of California, Berkeley matter. Empirical limitations arise in datasets produced by the U.S. Census Bureau and Eurostat and are discussed in policy memos from the Brookings Institution and the Mercatus Center. Legal scholars appearing before the United States Court of Appeals for the Ninth Circuit and commentators writing for journals tied to Yale Law School and Harvard Law School note that the measure omits considerations central to cases adjudicated at the Supreme Court of the United States and to inquiries by the European Commission into multi-sided platforms.

Variants and related measures

Alternative concentration measures and related indices discussed in the literature from University of Chicago, London School of Economics, and Brown University include the Concentration ratio, the Gini coefficient used in analyses by researchers at Oxford University, and entropy-based metrics explored by teams at University of Michigan and Duke University. Extensions employed in sectoral studies of banking—undertaken by analysts at the International Monetary Fund and the Bank for International Settlements—and in telecommunications reports by the International Telecommunication Union adapt the squared-share concept to weighted or normalized forms referenced in guidance from the Federal Trade Commission and the European Commission.

Category:Industrial organization