10 Facts About Herfindahl index

Herfindahl index is a measure of the size of firms in relation to the industry they are in and is an indicator of the amount of competition among them.

Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite.

Small Herfindahl index indicates a competitive industry with no dominant players.

When firms have unequal shares, the reciprocal of the Herfindahl index indicates the "equivalent" number of firms in the industry.

The Herfindahl index fails to take into consideration the complex nature of the market being tested.

The Herfindahl-Hirschman index is used as a starting point to gauge initial market power and then determine if additional information is needed to conduct further analysis on any potential anti-competitive concerns.

Therefore, the Herfindahl index is directly related to the weighted average of the profit margins of firms under Cournot competition with linear marginal costs.

Herfindahl index is a widely used metric for portfolio concentration.

In portfolio theory, the Herfindahl index is related to the effective number of positions held in a portfolio, where is computed as the sum of the squares of the proportion of market value invested in each security.

The H-Herfindahl index has been shown to be one of the most efficient measures of portfolio diversification.