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Step 1. Calculate the HHI for a monopoly with a market share of 100%. Because there is only one firm, it has 100% market share. The HHI is 100 2 = 10,000.
Step 2. For an extremely competitive industry, with dozens or hundreds of extremely small competitors, the value of the HHI might drop as low as 100 or even less. Calculate the HHI for an industry with 100 firms that each have 1% of the market. In this case, the HHI is 100(1 2 ) = 100.
Step 3. Calculate the HHI for the industry shown in [link] . In this case, the HHI is 16 2 + 10 2 + 8 2 + 7(6 2 ) + 8(3 2 ) = 744.
Step 4. Note that the HHI gives greater weight to large firms.
Step 5. Consider the example given earlier, comparing one industry where five firms each have 20% of the market with an industry where one firm has 77% and the other 23 firms have 1% each. The two industries have the same four-firm concentration ratio of 80. But the HHI for the first industry is 5(20 2 ) = 2,000, while the HHI for the second industry is much higher at 77 2 + 23(1 2 ) = 5,952.
Step 6. Note that the near-monopolist in the second industry drives up the HHI measure of industrial concentration.
Step 7. Review [link] which gives some examples of the four-firm concentration ratio and the HHI in various U.S. industries in 2009. (You can find market share data from multiple industry sources. Data in the table are from: Verizon (for wireless), The Wall Street Journal (for automobiles), IDC Worldwide (for computers) and the U.S. Bureau of Transportation Statistics (for airlines).)
| U.S. Industry | Four-Firm Ratio | HHI |
|---|---|---|
| Wireless | 91 | 2,311 |
| Largest five: Verizon, AT&T, Sprint, T-Mobile, MetroPCS | ||
| Automobiles | 63 | 1,121 |
| Largest five: GM, Toyota, Ford, Honda, Chrysler | ||
| Computers | 74 | 1,737 |
| Largest five: HP, Dell, Acer, Apple, Toshiba | ||
| Airlines | 44 | 536 |
| Largest five: Southwest, American, Delta, United, U.S. Airways |
In the 1980s, the FTC followed these guidelines: If a merger would result in an HHI of less than 1,000, the FTC would probably approve it. If a merger would result in an HHI of more than 1,800, the FTC would probably challenge it. If a merger would result in an HHI between 1,000 and 1,800, then the FTC would scrutinize the plan and make a case-by-case decision. However, in the last several decades, the antitrust enforcement authorities have moved away from relying as heavily on measures of concentration ratios and HHIs to determine whether a merger will be allowed, and instead carried out more case-by-case analysis on the extent of competition in different industries.
Both the four-firm concentration ratio and the Herfindahl-Hirschman index share some weaknesses. First, they begin from the assumption that the “market” under discussion is well-defined, and the only question is measuring how sales are divided in that market. Second, they are based on an implicit assumption that competitive conditions across industries are similar enough that a broad measure of concentration in the market is enough to make a decision about the effects of a merger. These assumptions, however, are not always correct. In response to these two problems, the antitrust regulators have been changing their approach in the last decade or two.
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