What is the Herfindahl-Hirschman index?
It can often be difficult to assess the concentration of a particular market by just looking at factors such as revenue, customers and location. The Herfindahl-Hirschman index is a equation that precisely measures market concentration among competitors. This is a popular tool not only for determining the levels of concentration, but also to demonstrate the existence of monopolies and other unfair practices. Although it is a commonly accepted method, there are still many problems with its results.
For such a complex purpose, the Herfindahl-Hirschman index has a surprisingly simple equation. In order to complete this calculation, the market share must be set for all participating companies. After calculating the market share, the percentage of each organization's shares is for the second and then all shares are added up. The resulting figure gives economists a specific view of the level of concentration of the market.
An example of the Herfindahl-Hirschman Index in Action would be four-racking clothing stores, two with 30 % market shares and two with 20 % market shares. If these numbers are individually and added up, the resulting number is 2,600. This number itself does not mean much, but financial experts use it as a picture of any market.
The closer to zero are the Herfindahl-Hirschman index numbers, the less concentrated the market. As the number of competing companies decreases, the resulting number increases. Markets between 1,000 and 1,800 are considered slightly concentrated. All higher than 1,800 is considered very concentrated.
The purpose of measuring market concentration consists in antitrust laws. The numbers generated by the Herfindahl-Hirschman Index are used in antitrusts to prove that one organization has a monopoly or is approaching this point. The index is also used in technology for geece and competition that shows the need for perfect competition and almost the impossibility of this success.
Herfindahl-H IndexIrschman is used in many legal cases and economic studies, but has received a fair amount of criticism. One of its weaknesses is an unrecognizable element of many markets. An example would be a cinema that can be compared and looked competitive, but they could still suffer because of other options such as cable TV, internet movies and video -toary. Geographic ranges are also a complex place for narrowing of competition, especially in the global economy that has become more saturated by the Internet.