The Herfindahl-Hirschman index

The Herfindahl-Hirschman index, better known as the Herfindahl index, is a statistical measure of concentration. It has achieved an unusual degree of visibility for a statistical index because of its use by the Department of Justice and the Federal Reserve in the analysis of the competitive effects of mergers. The Herfindahl index can be used to measure concentration in a variety of contexts. For example, it can be used to measure the concentration of income (or wealth) in U.S. households and also market concentration, that is, the degree of concentration of the output of firms in banking or industrial markets. It is useful in analyzing horizontal mergers because such mergers affect market concentration, and economic theory and considerable empirical evidence suggest that, other things equal, the concentration of firms in a market is an important element of market structure and a determinant of competition. However, despite its visibility, the Herfindahl index is sometimes not understood in terms of its use, measurement, or interpretation in merger analysis. To facilitate and simplify the application of the antitrust laws regarding mergers, in 1982 the Department of Justice published formal numerical guidelines for horizontal mergers (those between firms operating in the same product and geographic markets) based on the Herfindahl index (HHI). In 1985, the Justice Department proposed somewhat modified numerical guidelines for mergers in the banking industry and published revised guidelines