From the U.S. Department of Justice:
The Herfindahl-Hirschman Index is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty percent, the HHI is 2600 (30^2 + 30^2 + 20^2 + 20^2 = 2600). The HHI ranges from l0,000 (in the case of a pure monopoly) to a number approaching zero (in the case of an atomistic market). Although it is desirable to include all firms in the calculation, lack of information about small firms is not critical because such firms do not affect the HHI significantly.
The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.
Markets in which the HHI is between 1000 and 1800 points are considered to be moderately concentrated, and those in which the HHI is in excess of 1800 points are considered to be concentrated. Transactions that increase the HHI by more than 100 points in concentrated markets presumptively raise antitrust concerns under the Horizontal Merger
Guidelines -- http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html -- issued by the U.S. Department of Justice and the Federal Trade Commission. See /Merger Guidelines ? 1.51./
KEYWORDS: FIRM SIZE, MONOPOLY
(Source: Femida Handy, ARNOVA listserv, 2/11/2005)