Herfindahl-Hirschman Index
The Herfindahl-Hirschman Index is a metric for how strongly a market is dominated by a few large players. Antitrust authorities use it to assess whether a planned corporate acquisition would restrict competition too much.
In some markets, many small providers share the customer base. In others, two or three corporations control almost everything. The Herfindahl-Hirschman Index expresses this difference as a single number. To calculate it, you take the market shares of all providers, square each one individually, and add up the results. Because squaring weights large shares especially heavily, the number rises as soon as a few firms dominate. It is named after the economists Orris Herfindahl and Albert Hirschman.
The number that decides acquisitions
Antitrust authorities must answer a difficult question with every major merger: will enough competition remain afterward? The index makes this question measurable. US authorities work with clear thresholds. Below 1000, a market is considered unconcentrated; above 1800, it is considered highly concentrated. In addition, the authorities look at how many points the value would rise due to the merger.
The index is also interesting for investors, though with the opposite sign. A company in a highly concentrated market can enforce higher prices and often earns more. This is exactly why the metric is so prominent in the tech industry. In cloud services, search engines, or chips for AI data centers, concentration is very high.
A common misconception: a high value does not automatically mean someone is breaking a law. Having market power is allowed. What’s prohibited is only abusing it or eliminating competition through acquisitions.
From market share to metric
The calculation is simple enough to do on a sheet of paper. You note down each company’s market share in percent. You multiply this number by itself. Then you add up all the results. A market with four equally sized providers at 25 percent each yields four times 625, or 2500.
By comparison: if a hundred providers share the market at one percent each, you get 100. A single provider with a hundred percent, on the other hand, yields 10,000, the highest possible value. So the scale ranges from nearly zero to 10,000.
The trick lies in the squaring. A 50 percent share yields 2500 points, while ten providers with 5 percent each together yield only 250. The same total market share, but a value ten times higher. This is why the index reacts sensitively to individual giants while almost completely ignoring tiny providers. This is intentional, since a company with a 0.2 percent market share holds nobody back.
When tech mergers end up in court
In business news, the index usually appears when a multi-billion-dollar acquisition is being reviewed. When Microsoft wanted to buy the game maker Activision Blizzard, authorities and lawyers argued for years over how to define the market. That’s because the metric depends entirely on how the market is delineated. Do you count all video games, or only console games? The result can double depending on the answer.
The number also comes up regularly in the AI debate. A single manufacturer supplies the vast majority of specialized chips for training large models. Three providers dominate the cloud market on which these models run. Politicians and regulators point to such figures when calling for stricter rules.
The index is also encountered outside of economics. Fund managers calculate it to check whether a portfolio is too dependent on a few stocks. Studies on the diversity of media or supply chains also draw on it. The principle always stays the same: it measures how unevenly something is distributed.