Herfindahl Hirschmann Index

Herfindahl Hirschmann Index (HHI)

The sum of squared market shares for all n industry competitors

By definition, concentration ratios rise with greater competitor size inequality within a given industry. Concentration ratios, however, are unaffected by the degree of size inequality within each respective group of leading firms. This can create problems because competition within industries featuring a handful of large competitors can be much more vigorous than in those where a single dominant firm faces no large adversaries. For example, although CR4 = 100 would signal monopoly in the case of a single dominant firm, it might describe a vigorously competitive industry if each of the leading four firms enjoy roughly equal market shares of 25 percent. The Herfindahl Hirschmann Index (HHI), named after the economists who invented it, is a popular measure of competitor size inequality that reflects size differences among large and small firms. Calculated in percentage terms, the HHI is the sum of the squared market shares for all n industry competitors:

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