Final answer:
The Herfindahl-Hirschman Index (HHI) is a statistical measure of market concentration used to evaluate competition levels in an industry by summing the squares of all firms' market shares. It helps determine whether a market is competitive or dominated by a few firms, which is critical for antitrust evaluations and regulatory bodies.
Step-by-step explanation:
The Herfindahl-Hirschman Index (HHI) is a widely used measure of market concentration and competition among firms within an industry. This index takes into account the market shares of all firms in the market by squaring each firm's market share and then summing these squares. The HHI can thus reveal information about the market's structure, indicating whether the market is highly concentrated (which might suggest less competition) or more fragmented (indicating more competition).
A related concept is the four-firm concentration ratio, but this only considers the market shares of the four largest firms, rather than all firms in the market. An increase in the HHI indicates a decrease in competition and an increase in market power for the largest firms. An HHI value of less than 1500 is considered to be a competitive marketplace, while a value greater than 2500 indicates a highly concentrated market, often leading to a closer examination by regulatory bodies for antitrust implications, especially in the case of mergers or acquisitions.
Understanding the HHI is essential not just for economic analysis but also for businesses planning a merger, regulators considering price cap regulation, and investigating potential regulatory capture.