What it means
The index takes every firm's share of a market, expressed in percentage points, squares it, and totals the squares. Squaring is the clever bit: it deliberately gives extra weight to large players, so a market with one 60% giant scores far higher than a market with six firms holding 10% each.
The scale runs from close to zero, for a market split among hundreds of tiny firms, up to 10,000, which is a pure monopoly where one company holds everything. As rough guidance, competition authorities often treat scores below 1,500 as unconcentrated, 1,500 to 2,500 as moderately concentrated, and above 2,500 as highly concentrated.
For a business, the HHI matters most when a deal is on the table. Regulators look at two things at once: the level of the index after the merger, and the size of the jump the merger causes, because a big increase inside an already concentrated market is what triggers a deeper review.
Outside the regulatory world, strategy and finance teams borrow the same arithmetic to describe customer concentration, supplier concentration or revenue mix. A lender reviewing your loan application might compute an HHI across your customer base to see how badly you would be hurt if the largest account walked away.
The number is only ever as good as the market definition sitting underneath it, which is where most of the argument happens in practice. Define the market narrowly, say premium oat milk sold in one city, and concentration looks alarming; define it as all dairy alternatives sold nationally and the same firms suddenly look modest.
In practice
Real-world examples
Example 1
A grocery chain wants to buy a smaller rival in the same three counties. Its advisers calculate a pre-deal HHI of 1,420 and a post-deal HHI of 1,780, a 360-point rise, and warn the board to prepare a detailed defence of its market definition before filing.
Example 2
A software company's finance director calculates an HHI of 2,500 on the revenue split across its five largest clients. The board uses that figure to justify a two-year push into smaller accounts, because losing the biggest client would wipe out roughly a third of turnover.
Example 3
A logistics investor screening the European parcel sector calculates an HHI of about 900 and concludes the market is fragmented. That reading supports a buy-and-build strategy of acquiring several small operators rather than betting on one incumbent.
Think of it
Think of market share like slices of a pizza. If one person owns the whole pizza, the index is at its maximum. If the pizza is cut into a hundred tiny crumbs shared by fifty people, the index is very low.
Formula
Calculation
HHI = the sum of each firm's market share squared, with shares written as whole percentage points.
Take a regional packaging market with five suppliers holding shares of 40%, 30%, 15%, 10% and 5%.
40 squared = 1,600
30 squared = 900
15 squared = 225
10 squared = 100
5 squared = 25
Adding those gives 1,600 + 900 + 225 + 100 + 25 = 2,850, which sits in the highly concentrated band.
Now suppose the 15% firm buys the 10% firm, creating a 25% player. The new shares are 40%, 30%, 25% and 5%, so the index becomes 1,600 + 900 + 625 + 25 = 3,150. The post-merger level of 3,150 and the 300-point increase are both large enough that a regulator would almost certainly ask hard questions before approving the deal.Case study
Seen in the real world
In this illustrative example, Northwind Grocers is a fictional supermarket group operating across a single metropolitan area. It holds 30% of local grocery spending, with rivals at 25%, 20%, 15% and 10%, giving a market HHI of 900 + 625 + 400 + 225 + 100 = 2,250, moderately concentrated.
Northwind agrees to acquire the 15% rival, which would create a 45% leader. The recalculated index becomes 2,025 + 625 + 400 + 100 = 3,150, a 900-point jump into the highly concentrated band. The competition authority opens a full review, and Northwind's advisers argue the market should include convenience stores and online delivery, which would reduce its own share to 22% and pull the index below 1,800.
The regulator accepts a broader market definition but still requires Northwind to sell four overlapping stores as a condition of approval. The finance team's later verdict, in this fictional scenario, is that running the HHI calculation early would have flagged the divestment cost months before the price was agreed.
Watch out
Common mistakes
- Using decimals instead of percentage points, so a 40% share is entered as 0.40 and squared to 0.16. That produces an index on a completely different scale and makes the result impossible to compare against the usual thresholds.
- Treating the HHI level as the only thing regulators care about. The change caused by a transaction matters just as much, and a modest deal in a fragmented market rarely attracts attention even if the level is high.
- Accepting whatever market definition is most convenient. Since the whole index depends on which competitors and products are counted, a self-serving definition produces a number nobody outside the room will believe.
Questions
People also ask
Does the HHI need every competitor's share to be accurate?
Not really, because tiny firms contribute almost nothing once squared, so a reasonable estimate of the long tail is usually enough.
Can the HHI be used for something other than merger review?
Yes, it is widely used to measure customer, supplier, geographic or product concentration inside a single business.
What HHI score counts as safe?
There is no universal answer, though a level under 1,500 combined with a change of less than 100 points is generally treated as unlikely to raise competition concerns.