# What does a low Herfindahl Index mean?

What does a low Herfindahl Index mean? The Herfindahl-Hirschman Index is an index that measures the market concentration of an industry. A low degree of concentration means that the industry is closer to a perfect

## What does a low Herfindahl Index mean?

The Herfindahl-Hirschman Index is an index that measures the market concentration of an industry. A low degree of concentration means that the industry is closer to a perfect competition scenario, where many firms of more or less equal size share the market.

What does Herfindahl Index indicate?

The term “HHI” means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. The HHI takes into account the relative size distribution of the firms in a market.

Why the Herfindahl-Hirschman Index is superior to the concentration ratio?

The primary advantage of the Herfindahl-Hirschman Index (HHI) is the simplicity of the calculation and the small amount of data required for the calculation. Also, firms are weighted according to their size, which makes the HHI superior to other measures, like the concentration ratio.

### What is the maximum value of the Herfindahl Index?

10,000
The HHI reaches a maximum value of 10,000 when a monopoly exists in which one firm has 100 percent of the market, that is, the HHI = (100)2 = 10,000.

What is the range of HHI?

HHI Index can range from 0 to 10,000 if whole percentage numbers are used. Similarly, it can range from 0 to 1, where market shares are used as fractions. E.g. if there’s only one firm operating in an industry, holding 100% market share, it’s respective HHI would be exactly 10,000 or 1 and would indicate a monopoly.

What is the difference between HHI and concentration ratio?

The Herfindahl-Hirschman Index (HHI) provides a more complete picture of industry concentration than the concentration ratio does. The HHI avoids the problem that concentration ratios do not reflect changes in the size of the largest firms.

#### How do you interpret the four-firm concentration ratio?

The four-firm concentration ratio is calculated by adding the market shares of the four largest firms: in this case, 16 + 10 + 8 + 6 = 40. This concentration ratio would not be considered especially high, because the largest four firms have less than half the market.

What is the 3 firm concentration ratio?

Definition of Concentration Ratios The percentage of market share taken up by the largest firms. It could be a 3 firm concentration ratio (market share of 3 biggest) or a 5 firm concentration ratio. Concentration ratios are used to determine the market structure and competitiveness of the market.

How do I calculate the Herfindahl Index?

You can calculate Herfindahl Index by squaring the market share for each firm (up to 50 firms) and then adding the squares. In a perfectly competitive market, HHI should approach zero.

## Why is the largest possible value of the Herfindahl index is 10000?

The largest possible value of the Herfindahl index is 10,000 because: An industry with an index higher than 10,000 is automatically regulated by the Justice Department An index of 10,000 corresponds to 100 firms with a 1% market share each An index of 10,000 corresponds to a monopoly firm with 100% market share.