Editing Herfindahl–Hirschman index (section)

==Example==
Consider an example of 3 firms before and after a merger, with the top 2 firms producing 40% of goods each, and the other firm producing 20%. 

'''Prior to Merger:''' <math>0.4^2+0.4^2+0.2^2=0.36=36\%</math><ref name=":1">{{Cite journal|last=Rhoades|first=Stephen A.|date=March 1993|title=The Herfindahl-Hirschman Index|url=https://fraser.stlouisfed.org/files/docs/publications/FRB/pages/1990-1994/33101_1990-1994.pdf|journal=[[Federal Reserve Bulletin]]|volume=79|issue=March|pages=188–189|publisher=[[Federal Reserve Bank of St. Louis]]}}</ref>

Now let's consider the top 2 firms merging.

'''Post Merger:''' <math>(0.4 + 0.4)^2+0.2^2=0.68=68\%</math><ref name=":1" />

As can be seen prior to the merger, the HHI, while not low, is in a range that allows for strong competition. However, post merger the HHI reaches 68%, approaching a HHI consistent with monopolies. This high HHI would lead to weak competition.<ref name=":1" /> 

This demonstrates how the HHI enables antitrust authorities to understand the impact that mergers have on the market.<ref name=":0" />

The index involves taking the market share of the respective market competitors, squaring it, and adding them together (e.g. in the market for X, company A has 30%, B, C, D, E and F have 10% each and G through to Z have 1% each). When calculating HHI the post merger level of the HHI score and the total increase of the HHI score are considered when reviewing the outcome. If the resulting figure is above a certain threshold then economists will consider the market to have a high concentration (e.g. market X's concentration is 0.142 or 14.2%). This threshold is considered to be 0.25 in the U.S.,<ref>{{harvnb|United States Department of Justice|2010|loc=§ 5.3}}</ref> while the EU prefers to focus on the level of change, for instance that concern is raised if there is a 0.025 change when the index already shows a concentration of 0.1.<ref name="dojguidelines"/> So to take the example, if in market X company B (with 10% market share) suddenly bought out the shares of company C (with 10% also) then this new [[market concentration]] would make the index jump to 0.162. Here it can be seen that it would not be relevant for merger law in the U.S. (being under 0.18) or in the EU (because there is not a change over 0.025).