In the United States, antitrust authorities use the Herfindahl-Hirschman Index (HHI) to evaluate the potential effects of a merger on market concentration.
The HHI is constructed by adding up the squared market share (expressed in percentage terms) of every firm in the market.
For example, if there are four firms with market shares of 50, 30, 10, and 10 percent, respectively, then the HHI is calculted as follows:
HHI = 502 %20 302 %20 102 %20 102
= 2,500 %20 900 %20 100 %20 100
=3,600
In contrast, a market with four equal-sized firms will have an HHI of 2,500:
HHI = 252 %20 252 %20 252 %20 252
=2,500
In theory, the HHI can range from a minimum of zero (in a market with a very large number of firms with infinitesimal shares) to a maximum of 10,000 (in a market with a monopoly). Lower values of the HHI signify less concentrated markets and higher values signify the opposite.
In the United States, the Horizontal Merger Guidelines set thresholds for the change in the HHI for the purpose of determining whether a horizontal merger may have anti-competitive effects by generating market power. The guidelines start by defining a pre-merger market as being:
- “Unconcentrated” if the HHI is less than 1,000
- “Moderately concentrated” if the HHI is between 1,000 and 1,800, and
- “Concentrated” if the HHI is above 1,800.
If as a result of a horizontal merger, the HHI would increase by less than 100 points in a moderately unconcentrated market, or by less than 50 points in a concentrated market, that merger is considered to be “safe.”