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The Herfindahl-Hirschman Index (HHI) is commonly used to measure the level of market concentration in a given sector. Developed in the 1950s by economist Orris C. Herfindahl and economist Albert O. Hirschman, it has been widely used by researchers, industry professionals, and regulatory agencies as an efficient way to gauge a market’s competitive nature.
In its most basic form, the HHI is simply the sum of the squares of the market share of all the firms involved in an industry. It is a simple, effective way of measuring market concentration, and it serves a variety of purposes. For instance, it can be used to assess the competitive nature of emerging industries and the potential degree of anti-competitive market behaviour (e.g. tacit collusion, predatory pricing tactics, monopsony/monopoly).
From an antitrust regulation standpoint, the HHI is often used by regulators to identify markets where anti-competitive practices may be occurring or where there may be threats to competition or consumer welfare. Generally, the HHI provides an indication of the degree of market concentration and competitiveness in a particular sector. For example, a market with an HHI of less than 1,500 is categorised as a competitive sector, while an HHI of 1,500 to 2,500 is predicted as a moderately concentrated sector, and an HHI of more than 2,500 signals a highly concentrated sector.
However, the HHI is not a comprehensive measure as it generally fails to take into account the complexities of various markets. Different market conditions may exist, such as different business practices, local factors, and other considerations that play an important role in determining the true competitiveness of a given sector. Additionally, the HHI does not consider other factors that may be important to the market such as price, barriers to entry, and product variety. These shortcomings should be kept in mind when deciding whether to base a decision solely on the results of an HHI review.
In summary, the Herfindahl-Hirschman Index is a quick and simple way to estimate the concentration level of a market and to provide a comparison between different markets. It can be an effective tool for antitrust regulation and for developing strategies for improvement. However, it is important to realise that the HHI can only be used to provide a high-level indication of a sector’s competitiveness, and should not be treated as a valid measurement in itself.
In its most basic form, the HHI is simply the sum of the squares of the market share of all the firms involved in an industry. It is a simple, effective way of measuring market concentration, and it serves a variety of purposes. For instance, it can be used to assess the competitive nature of emerging industries and the potential degree of anti-competitive market behaviour (e.g. tacit collusion, predatory pricing tactics, monopsony/monopoly).
From an antitrust regulation standpoint, the HHI is often used by regulators to identify markets where anti-competitive practices may be occurring or where there may be threats to competition or consumer welfare. Generally, the HHI provides an indication of the degree of market concentration and competitiveness in a particular sector. For example, a market with an HHI of less than 1,500 is categorised as a competitive sector, while an HHI of 1,500 to 2,500 is predicted as a moderately concentrated sector, and an HHI of more than 2,500 signals a highly concentrated sector.
However, the HHI is not a comprehensive measure as it generally fails to take into account the complexities of various markets. Different market conditions may exist, such as different business practices, local factors, and other considerations that play an important role in determining the true competitiveness of a given sector. Additionally, the HHI does not consider other factors that may be important to the market such as price, barriers to entry, and product variety. These shortcomings should be kept in mind when deciding whether to base a decision solely on the results of an HHI review.
In summary, the Herfindahl-Hirschman Index is a quick and simple way to estimate the concentration level of a market and to provide a comparison between different markets. It can be an effective tool for antitrust regulation and for developing strategies for improvement. However, it is important to realise that the HHI can only be used to provide a high-level indication of a sector’s competitiveness, and should not be treated as a valid measurement in itself.