The Herfindahl Hirschman Index determines if a monopoly exists. The calculation gives higher weight to larger firms but also allows firms outside of the top four largest to factor into the equation. A similar index is the Four-Firm Concentration Ratio, which only factors in the four largest firms. The lower the Herfindahl Hirschman Index, the more spread out the market share with many large firms. The higher the Herfindahl Hirschman, the more concentrated the market share with only a couple of large firms.
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Determine the firms in the market.
Calculate the market share of each firm. Market share represents a firm's sales in a market divided by total sales in the market. Market share information can be obtained from sources such as the Market Share Reporter, trade journals, industry statistics from the Census Bureau and annual reports from companies.
Square the market share of the first firm. For example, if a firm has a 25 per cent market share, the equation is 25^2, which equals 625. The U.S. Justice Department eliminates decimals when converting a percentage to a whole number.
Repeat Step 3 for every firm in the market you are analysing.
Add up all the firm numbers from Steps 4 and 5 to arrive at the Herfindahl Hirschman Index.
Compare the computed index to the U.S. Department of Justice classifications of "unconcentrated (HHI below 1,000), moderately concentrated (HHI between 1,000 and 1,800), and highly concentrated (HHI above 1,800)" to determine market concentration.
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