HERFINDAHL INDEX Meaning and
Definition
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The Herfindahl index, also known as the Herfindahl-Hirschman Index (HHI), is a quantitative measure used to assess the concentration or level of market competition within a particular industry or market. It is named after economists Orris C. Herfindahl and Albert O. Hirschman, who first introduced the index.
The Herfindahl index is calculated by summing the squares of the market shares of all firms within the industry. To determine the market share of each firm, the percentage of its total sales revenue compared to the total sales revenue of all firms in the industry is used. The resulting index ranges from 0 (perfect competition) to 1 (monopoly), with higher values indicating a higher level of market concentration and less competition.
The index serves as a valuable tool for antitrust authorities and economists to analyze market structures and explore potential issues related to market power or competition. In general, a higher Herfindahl index implies fewer competitors and a less competitive market, which may lead to increased prices, reduced consumer choice, and limited innovation. Conversely, a lower Herfindahl index suggests a more competitive market with a larger number of firms and potentially lower prices.
By measuring market concentration, policymakers can make informed decisions regarding competition policy, mergers and acquisitions, and regulatory intervention to promote healthy competition and protect consumer welfare.
Etymology of HERFINDAHL INDEX
The term "Herfindahl index" is named after Orris C. Herfindahl, an economist who developed the concept in the 1950s. The index is a measure of market concentration and is used to determine the competitiveness of a particular industry. It is calculated by summing the squares of the market shares of all the firms within the industry. The higher the index, the more concentrated the market is.
