How to Calculate the HHI Change from a Horizontal Merger
A horizontal merger raises the Herfindahl-Hirschman Index by 2 × share A × share B, so two firms holding 25% and 20% of a market add 1,000 points to it.
The Horizontal Merger formula
Calculator
Enter the two merging shares and the rest of the market to get the change in HHI and the post-merger figure.
Percent of industry sales, entered as a whole number.
The other party to the deal, also as a whole-number percent.
Needed for the pre-merger index, not for the change.
Set unused firms to zero.
All five shares should add to 100 in a market with no other sellers.
Doubling the product of the two shares adds 1,000 points, and nothing the other firms do changes that figure.
- Pre-merger HHI
- 2,250
- Post-merger HHI
- 3,250
- Combined share of the merged firm
- 45%
- Concentration after the merger
- Highly concentrated
Squaring every share and adding gives 2,250 before the deal.
The index lands at 3,250, the same answer as recomputing it with the combined firm written in.
The survivor holds 45% of the market, which is what customers of either firm now face.
Regulators read the level and the size of the jump together, so a big increase inside an already concentrated market is what draws attention.
How to calculate Horizontal Merger, step by step
- 1Write every firm's market share as a percent. Use whole numbers, so a firm with a quarter of industry sales enters as 25 rather than 0.25, and check that the shares add to 100.
- 2Square the shares and add them for the pre-merger HHI. Squaring gives large firms extra weight, and the sum runs from near zero in a fragmented market up to 10,000 when one seller holds everything.
- 3Multiply the two merging shares and double the result. The change in the index is 2 × share A × share B, and it does not depend on anything the other firms in the market are doing.
- 4Add the change to the pre-merger figure. Post-merger HHI = pre-merger HHI + change, which is the same answer you get by recalculating the whole index with the combined firm written in.
- 5Judge the level and the jump together. Agencies look at how concentrated the market ends up and how far the deal moved it, because a large increase in an already concentrated market is what invites a closer review.
Worked example: Horizontal Merger
An industry has five firms with shares of 30%, 25%, 20%, 15% and 10%. The pre-merger HHI is 900 + 625 + 400 + 225 + 100 = 2,250. The second and third firms merge, so the change is 2 × 25 × 20 = 1,000 and the post-merger HHI is 2,250 + 1,000 = 3,250. Recalculating from scratch with shares of 30%, 45%, 15% and 10% gives 900 + 2,025 + 225 + 100 = 3,250, the same answer by the longer route. The merged firm now holds 45% of the market, and an index above 2,500 puts it in the highly concentrated band.
Horizontal Merger questions
Why does a merger raise the HHI by 2 × share A × share B?
Before the deal the two firms contribute A² + B² to the index. Afterward the single combined firm contributes (A + B)², which expands to A² + 2AB + B². The two squares were already counted, so the only new material is 2AB, no matter how the rest of the market is split.
What HHI level counts as concentrated?
The thresholds usually taught put a market below 1,500 as unconcentrated, 1,500 to 2,500 as moderately concentrated, and above 2,500 as highly concentrated. Competition agencies revise their screening cutoffs from time to time, so check the guidelines in force before applying a number to a live deal.
Does a large HHI increase mean the merger will be blocked?
No. Concentration figures are a screen for deciding which deals deserve a close look, not a verdict on them. Regulators then weigh the cost savings the merging firms can actually prove against the competition lost, and ask whether other firms could enter or expand enough to defeat a price rise.
Does the same formula work for a vertical merger?
Not within one market. A vertical merger joins a buyer and a seller at different stages of the supply chain, so no market loses a competitor and every share stays where it was. The 2AB shortcut applies only when both firms sell to the same customers.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated