Formula
where si is the market share of firm i in the market, and N is the number of firms. Thus, in a market with two firms that each have 50 percent market share, the Herfindahl index equals 0.502+0.502 = 1/2.
The Herfindahl Index (H) ranges from 1/N to one, where N is the number of firms in the market. Equivalently, if percents are used as whole numbers, as in 75 instead of 0.75, the index can range up to 1002, or 10,000.
A HHI index below 0.01 (or 100) indicates a highly competitive index.
A HHI index below 0.15 (or 1,500) indicates an unconcentrated index.
A HHI index between 0.15 to 0.25 (or 1,500 to 2,500) indicates moderate concentration.
A HHI index above 0.25 (above 2,500) indicates high concentration .
A small index indicates a competitive industry with no dominant players. If all firms have an equal share the reciprocal of the index shows the number of firms in the industry. When firms have unequal shares, the reciprocal of the index indicates the "equivalent" number of firms in the industry. Using case 2, we find that the market structure is equivalent to having 1.55521 firms of the same size.
There is also a normalised Herfindahl index. Whereas the Herfindahl index ranges from 1/N to one, the normalized Herfindahl index ranges from 0 to 1. It is computed as:
where again, N is the number of firms in the market, and H is the usual Herfindahl Index, as above.
Read more about this topic: Herfindahl Index
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