How do you interpret the HHI index?

How do you interpret the HHI index?

The U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.

What does a high Herfindahl index mean?

Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Alternatively, if whole percentages are used, the index ranges from 0 to 10,000 “points”.

What is the highest possible Herfindahl-Hirschman Index HHI score?

The Herfindahl-Hirschman Index (HHI) takes into account the relative size distribution of the companies that compete in a market. The larger the number of firms of relatively equal size the nearer to zero it approaches, and reaches its 10,000 maximum points when a market is controlled by just one firm.

How do you calculate 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.

What is the maximum value of the Herfindahl index?

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 a low Herfindahl index?

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 is the four-firm concentration ratio formula?

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.

How do you calculate cr4?

Add together the total sales for each of the four largest firms in your selected industry. Then divide that sum by the total sales of the industry. Convert that result to a percentage, and that percentage value is the four-firm concentration ratio.

Does high HHI always imply poor market performance?

The HHI value can range anywhere from near 0 up to 10,000. A higher index value means that the industry is considered to be closer to monopoly conditions. Generally, a market with an HHI value of under 1,000 is considered to be competitive.

Why is oligopoly bad?

An oligopoly discourages innovation by creating numerous barriers to market entry. Firms have no need to innovate because there aren’t new ideas being introduced to the market. At the end of the day, refinement is better than nothing, but it is never as good as new innovations.

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.

What is the four-firm concentration ratio How do you interpret the value?

A four-firm concentration ratio is one way of measuring the extent of competition in a market. It is calculated by adding the market shares—that is, the percentage of total sales—of the four largest firms in the market.

How to calculate the value of the Herfindahl Hirschman Index?

The formula for the Herfindahl-Hirschman Index is as follows: HHI = s₁² + s₂² + s₃² + … + sₙ² Where: sₙ – is the market share (percentage) of firm n n – is the number of enterprises in a given market. How to calculate HHI? – HHI calculation example If you are wondering how to calculate the value of the HHI index, here is a simple example.

What is the Herfindahl index of scientific prolificacy?

For the index of scientific prolificacy, see H-index. The Herfindahl index (also known as Herfindahl–Hirschman Index, HHI, or sometimes HHI-score) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them.

What should the value of the HHI index be?

In this case, the value of HHI index would be 10,000. On the other hand, if there were hundreds of small companies on the market, and each of them had nearly 0% market share, the HHI index would be around 0. Generally, it is agreed that: HHI above 2,500 indicates high market concentration.

What is the Herfindahl index of highly concentrated firms?

The Antitrust Division of the Department of Justice considers Herfindahl indices between 0.15 and 0.25 to be “moderately concentrated” and indices above 0.25 to be “highly concentrated”. When all the firms in an industry have equal market shares, H = N (1/N) 2 = 1/N.

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