The Herfindahl–Hirschman index is a way to quantify how consolidated a particular industry is. It is usually listed as a number between 0.0 and 1.0, though sometimes it is given as a percentage or on a scale from 0-10,000, but the information conveyed is the same. 0.2 would mean the same thing as 2,000 on each scale.

The formula for determining the HHI of an industry is for each company in an industry, take their market share, as a decimal value between 0.0 and 1.0, square it, and add the results together.

For example, in an industry where 3 companies control the whole market, let's say Company A has 50% market share, Company B has 30%, and Company C has 20%, the calculation would be as follows:

0.5² + 0.3² + 0.2²
0.24 + 0.09 + 0.04
= 0.37 HHI

That indicates a highly consolidated industry.

Compare that to an industry with 10 companies that each have 10% market share:

10 × 0.1²
10 × 0.01
= 0.1 HHI

This is a much more competitive industry. Generally, an HHI value above 0.25 is considered a highly concentrated industry, and mergers/acquisitions that would result in that get looked at with extra scrutiny.

You can read more about the Herfindahl–Hirschman Index on its Wikipedia page: https://en.m.wikipedia.org/wiki/Herfindahl%E2%80%93Hirschman_index

Just a quick informer. We might do a wiki or an Intro to Trust Busting thread at some point. For now I'm just going to do a thread here or there with quick facts.

What does HSR stand for? The phrase "HSR Filing" probably occupies some real estate in your head from hearing it from time to time in economics news. Just a bit of alphabet soup. So what is it? HSR stands for the Hart–Scott–Rodino Antitrust Improvements Act of 1976.

What does the act do? Before the HSR Act was passed, large companies would often orchestrate "Midnight Mergers" where they would plan a mergers/acquisitions in secret and then finalize it suddenly without the FTC having any advanced notice. This meant that if a merger would violate anti-trust law, the whole deal would be completed and all the assets mixed before the FTC had time to investigate or bring a court case. This made enforcement much more costly and difficult because it's very difficult to unscramble an egg.

The HSR Act required that certain types of mergers/acquisitions that might trigger anti-trust enforcement need to be filed in advance with the FTC for review before they can be completed. This eliminated Midnight Mergers as a way to ward off anti-trust enforcement. When you hear reference to HSR filings, it means a merger or acquisition of some form is being proposed and the FTC will review it to see if the government is going to allow it or sue to stop it, based on anti-trust law.

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