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An industry's level of competition is frequently evaluated using the Herfindahl-Hirschman Index (HHI), a measure of market concentration. It is determined by adding the squares of the market shares of all companies operating in the sector.
A greater value of the HHI, which spans from 0 to 10,000, denotes a more condensed market. A market is deemed to be competitive if its HHI is below 1,500, and it is highly concentrated if it is above 2,500. An HHI of 2,500 is regarded by the US Department of Justice as a highly concentrated market, and transactions in that sector may be given closer scrutiny.
Antitrust authorities use the HHI to pinpoint markets where there may be a lack of competition and to evaluate how mergers and acquisitions might affect the market. Investors use it as well to assess how competitively-positioned businesses are within an industry and to find prospective investment possibilities.
