(Percent Company 1 Market Share x 100)^2 + (Percent Company 2 Market Share x 100)^2 + (Percent Company 3 Market Share x 100)^2 + … (Percent Company n Market Share x 100)^2 = HHI
So, for example, if you have three companies with the following market saturation, you'd do the math like so:
Company 1: 33%
Company 2: 10%
Company 3: 57%
(33^2) + (10^2) + (57^2) = HHI
1,089 + 100 + 3,249 = 4,438
But let's say you have nine companies instead:
Company 1: 20%
Company 2: 10%
Company 3: 19%
Company 4: 15%
Company 5: 10%
Company 6: 10%
Company 7: 5%
Company 8: 5%
Company 9: 6%
(20^2) + (10^2) + (19^2) + (15^2) + (10^2) + (10^2) + (5^2) + (5^2) + (6^2) = 1372
The number of companies and their percent control of the market really makes a huge difference when calculating this index.
How to use the Herfindahl-Hirschman Index
Once you've calculated the HHI for your industry or industry segment, it's a simple matter of comparing the number you get with the general guidelines that have been established to tell you if the industry is saturated. You can, in theory, have a number ranging anywhere from a very small fraction approaching zero to 10,000.
There are different guidelines to interpret this number, with a rule of thumb saying that less than 1,500 is competitive, between 1,500 and 2,500 is moderately concentrated, and anything above 2,500 is highly concentrated. The U.S. Department of Justice's antitrust division uses slightly different numbers.
In a Jan. 17, 2024, update, the Justice Department outlined the following criteria for the HHI:
- Below 1,000: Competitive.
- 1,000 to 1,800: Moderately concentrated.
- 1,800 or more: Highly concentrated.
Any merger or acquisition that increases the HHI by more than 100 points in an already highly concentrated market is assumed to enhance the market power of that newly formed company, per the guidelines jointly issued by the Department of Justice and the Federal Trade Commission.
