How this instrument works
The Herfindahl-Hirschman Index measures how concentrated a market is by squaring every firm's market-share percentage and adding the squares together. Squaring is the deliberate part: a firm holding 40% of a market contributes 1,600 points on its own, while four firms splitting that same 40% evenly contribute only 400 combined — so the index rewards fragmentation and punishes dominance far more sharply than counting competitors or adding raw shares ever could.
Antitrust economists at the Department of Justice and the Federal Trade Commission run this exact calculation before a proposed merger is waved through or challenged. The index runs from near zero, for a market of thousands of tiny rivals, up to 10,000, where a single firm holds everything. U.S. merger guidelines split that range into bands: under 1,500 reads as unconcentrated, 1,500 to 2,500 as moderately concentrated, and above 2,500 as highly concentrated — and a deal that pushes a market past those lines is where regulatory scrutiny tends to start.
The index only sees the five inputs it is given, so an incomplete set of shares — one that drops a real competitor or shortchanges the residual 'everyone else' figure — understates concentration and hides the number a regulator would actually compute. It also treats every percentage point the same regardless of what the firms actually sell, so an HHI run on a broad category can miss a genuine monopoly sitting inside a narrower, better-defined market.
- Enter Firm 1 market share, % through Firm 4 market share, % as the percentage each firm holds of total sales.
- In Firm 5 market share (and all smaller firms combined), %, lump together every remaining competitor so the five figures sum to 100%.
- Read the Herfindahl-Hirschman Index the instrument returns from the squared and summed percentages.
- Compare that figure against the unconcentrated, moderately concentrated, and highly concentrated bands described below.
Worked example — five firms at 30/25/20/15/10 percent
Take five firms holding 30%, 25%, 20%, 15%, and 10% of a market — a plausible split in, say, regional grocery retail. Squaring each share gives 900, 625, 400, 225, and 100, and summing those five squares gives an HHI of 2,250.
That figure lands inside the 1,500-to-2,500 moderately concentrated band, meaning the market has real structure but no single firm approaches dominance. Under the Department of Justice's merger guidelines, a deal between two of these firms that pushed the resulting HHI above 2,500 while adding more than 200 points would typically draw a harder antitrust look — precisely the boundary this index was built to flag.
Questions
Why does the formula square each market share instead of adding them?
Squaring makes big shares count disproportionately more than small ones. A firm at 40% contributes 1,600 points to the index; four firms splitting that same 40% evenly contribute only 400 combined. Simple addition of shares always sums to 100 regardless of concentration, so it cannot distinguish a monopoly from ten equal rivals — squaring is what makes the index sensitive to dominance rather than headcount.
What counts as unconcentrated, moderately concentrated, or highly concentrated?
An HHI under 1,500 is generally read as unconcentrated, 1,500 to 2,500 as moderately concentrated, and above 2,500 as highly concentrated, following the bands used in U.S. merger review. These are reference points for antitrust screening, not hard legal limits — regulators weigh the actual product market, entry barriers, and buyer power alongside the number.
Where do accurate market-share figures for the fields come from?
Public companies disclose revenue by segment in annual filings; private-market shares usually come from trade associations, market-research firms, or filings tied to a specific merger review. The index is only as reliable as the shares fed into it — a rough estimate produces a rough HHI, not a wrong one, so treat results near a band boundary with caution.
I only know four competitors — can I leave the fifth field at zero?
Leave it at zero only if a fifth firm genuinely does not exist; otherwise fill Firm 5 market share (and all smaller firms combined), % with everything else in the market, even a long tail of small players. Omitting real competitors understates concentration, because every share left out is a squared value the true index would have included.
Does a high HHI mean a merger will automatically be blocked?
No — a high or sharply rising HHI is a screening trigger for closer review, not an automatic block. Regulators weigh the index alongside entry barriers, buyer power, claimed efficiencies, and the specific products at stake before a deal is cleared, modified, or challenged. This instrument returns the number; it does not return a verdict.
Does HHI apply to anything besides antitrust review?
Yes — portfolio managers run the identical formula on position weights to measure concentration risk, and geographers apply it to measure how evenly a population spreads across regions. The arithmetic never changes; only the units being squared and summed do, from market share to portfolio weight to population share.
References
- U.S. Department of Justice — Herfindahl-Hirschman Index defined
- DOJ & FTC — Horizontal Merger Guidelines
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.