Identification of Market Structure – HHI

The Herfindahl-Hirschman Index (HHI) is a commonly used measure to identify the market structure of an industry. It is calculated by squaring the market share of each firm in the industry and adding up the results. The higher the HHI, the more concentrated the market is.

HHI values can be interpreted as follows:

- HHI below 1,500: indicates a highly competitive market, with many small firms and no dominant players.
- HHI between 1,500 and 2,500: indicates a moderately concentrated market, with some dominant firms but still room for competition.
- HHI above 2,500: indicates a highly concentrated market, with a few dominant firms and limited competition.

For example, if an industry has four firms with market shares of 30%, 25%, 20%, and 15%, respectively, the HHI would be calculated as follows:

HHI = (0.3^2 + 0.25^2 + 0.2^2 + 0.15^2) x 10,000
HHI = 1,855

This HHI value falls within the moderately concentrated range, indicating that there are some dominant firms but still room for competition in the industry.