HHI

HHI stands for Herfindahl-Hirschman Index. This number describes how strongly a market is concentrated among a few large companies. A market here simply means the totality of all providers selling the same product. To calculate it, you take each company’s market share as a percentage. Each of these shares is squared, meaning multiplied by itself. All the squared values are then added together to form a single number.

What the index reveals about competition

The value theoretically ranges between almost 0 and 10,000. If a hundred equally sized companies share a market, each has a one percent share. That gives a hundred times one, so an HHI of 100. If, on the other hand, a single company owns the entire market, the calculation is 100 times 100, landing at 10,000. A high value therefore means: a few players determine what is offered and what it costs.

This is exactly why antitrust authorities use the HHI. These are government bodies that check whether companies are undermining competition. US authorities classify markets below 1,000 as unconcentrated. Between 1,000 and 1,800, a market is considered moderately concentrated, and above that, highly concentrated. These thresholds are not natural laws but political determinations that have changed over the years.

For investors, the index is interesting for a different reason. Companies in concentrated markets often have higher profit margins because they face less pricing pressure. At the same time, the risk of government intervention increases for them. A high HHI is therefore both a good and a dangerous sign at once.

Why squaring is used

Squaring is the actual trick of the formula. It ensures that large shares carry much more weight than small ones. A provider with 50 percent contributes 2,500 points. Fifty providers with one percent each contribute only 50 points combined. Although both groups hold half the market, the index rates them completely differently.

An example makes this tangible. In Market A, four companies each hold 25 percent, giving an HHI of 2,500. In Market B, one company holds 70 percent and thirty small companies hold one percent each. There, the HHI comes out to around 4,930, even though there are far more providers. The sheer number of companies therefore says little. Only the distribution shows who truly holds power.

A common mistake is confusing the HHI with the four-firm concentration ratio. This only adds up the shares of the four largest providers. It ignores whether these four are equally strong or whether one dominates. The HHI accounts for every company in the market and weights by size. For this, it also needs more data, which is often hard to obtain.

The index in tech news

The HHI most often comes up when one corporation wants to acquire another. Authorities then calculate what the value would look like after the merger. If it rises sharply and the market is already above the critical threshold, the acquisition is scrutinized closely. Sometimes authorities block it, sometimes they allow it only under conditions. A company might then, for example, have to sell off a business unit.

In the tech industry, this metric is often cited because many markets there are extremely concentrated. Cloud data centers, smartphone operating systems, or the manufacturing of cutting-edge chips lie in few hands. Experts also discuss whether a similar concentration is emerging with AI models. The HHI provides a number for this that can be debated.

Yet one weakness remains. The result depends entirely on how the market is defined. Do you count only streaming services, or all television offerings combined? Depending on the answer, the value changes dramatically. It is precisely over this definition that corporations and authorities often battle in court for years.