How To Calculate the Herfindahl Index

To calculate the Herfindahl index you must first have a calculator or a computer.  Computers have a calculator built in usually, so you can use that one if you want to.  Cell phones also have a calculator function on them so you can use that also.  You can also do it on paper if you want to.

First you need to define your different variables that you are going to use in your Herfindahl Index calculation.  For example, you can use 5 different companies and 5 different market share percentages.  Each company can have a different market share percentage.  Company A can have 20 percent, company B can have 30 percent, company C can have 30 percent, company D can have 10 percent, and company E can have 10 percent.  There is a formula that you can use to calculate the Herfindahl Index.  The formula is as follows :

(0.20)^2+ (0.30)^2 + (0.30)^2 + (0.10)^2 + (0.10)^2 = 0.24.

This calculation can be performed very quickly on a calculator.  You can also do it by hand if you want to.  It is a very simple math calculation that will not take much time to calculate.

Once you have calculated the results, you can save them to a computer or you can write them down on paper.  You can look at the results and interpret that the companies have a pretty good market share percentage on average.  The higher the Herfindahl Index would mean the more of a market share percentage meaning that the market would be dominated by those companies.

Here is another example of how you can calculate the Herfindahl Index.  Company A has a 10 percent market share, company B has a 10 percent share, company C has a 30 percent share, company D has a 40 percent share, and company E has a 10 percent share.

Here is the formula :

(0.10)^2+ (0.10)^2 + (0.30)^2 + (0.40)^2 + (0.10)^2 = 0.28.  This is a good Herfindahl Index and shows that the market has a high percentage share.  You can calculate the Herfindahl Index with many different sets of companies and numbers and compare the different results.  You can easily see how much competition there is in a particular industry with this simple formula.  You can see the size of each company and how it affects the industry that they are in.  Many companies use the Herfindahl Index.