How to Calculate the Herfindahl-Hirschman Index (HHI)
The HHI equals the sum of the squared market shares (as whole-number percentages) of every firm: HHI = Σ (share%)².
Formula
Steps
- 1List every firm's market share. Write down each firm's share of total market sales as a whole-number percentage (for example 40, not 0.40).
- 2Square each market share. Multiply each firm's percentage share by itself, so a 40% firm contributes 40² = 1600.
- 3Add up all the squared shares. Sum the squared values across all firms in the market to get the HHI, which ranges from near 0 up to 10,000 (a pure monopoly with one 100% firm).
- 4Compare against the antitrust thresholds. Below 1500 is competitive (unconcentrated), 1500 to 2500 is moderately concentrated, and above 2500 is highly concentrated.
Worked example
Suppose a market has five firms with shares of 40%, 30%, 15%, 10%, and 5%. Square each share: 40² = 1600, 30² = 900, 15² = 225, 10² = 100, 5² = 25. Add them: 1600 + 900 + 225 + 100 + 25 = 2850. Because 2850 is above 2500, this market is highly concentrated.
Frequently asked questions
What does the HHI tell you about a market?
The HHI measures how concentrated a market is, meaning how much of it a few large firms control. A higher number signals more concentration and market power: below 1500 is treated as competitive, 1500 to 2500 as moderately concentrated, and above 2500 as highly concentrated by U.S. antitrust regulators.
Why do you square the market shares?
Squaring gives extra weight to larger firms, so a market dominated by one big firm scores much higher than one split evenly among many small firms. This lets the HHI capture dominance that a simple count of firms would miss.
What is the difference between the HHI and the concentration ratio?
The concentration ratio just adds the raw shares of the largest firms (usually the top four), while the HHI squares and sums the shares of all firms. The HHI is more informative because it reflects both the number of firms and the inequality of their sizes.
What is the maximum possible HHI?
The maximum is 10,000, which occurs when a single firm holds 100% of the market (100² = 10,000). That represents a pure monopoly, the most concentrated market possible.
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