In the battle for market share, one of the fastest ways for a business to win is to outright buy a competitor. The consequences of such an operation can then be measured using the Herfindahl-Hirschmann index. A name very often abbreviated as IHH for obvious practical reasons.
This indicator owes its name to a duo of economists, Orris Herfindahl (1918-1972) and Albert Hirschmann (1915-2012). Each working in the United States on their own, they ended up in the 1950s and 1960s with very similar formulas. The combination of their research yielded the IHH, a calculation to measure the intensity of competition in a given market.
The formula is actually quite simple. The HHI is only the sum of the square of the market share held by each company in a market. The result is therefore a single easily readable figure which varies according to the number of actors present and their respective weight.
The HHI tends towards zero when competition brings together a multitude of very small businesses and peaks at 10,000 in the event of a monopoly. For example, it reaches 1,000 if ten groups share a market equally. But jumps to nearly 3,000 if one of the ten actors takes half the pie.
This indicator is often seen as a justice of the peace for the competition authorities responsible for giving the green light to company mergers. Thus, the doctrine of the European Commission is not to intervene in the event of a movement “on a market where the HHI at the end of the concentration will be less than 1000” and not to flinch, “except in exceptional cases” as long as a merge does not move the IHH by more than 150.