Dynamics of the Hirschman–Herfindahl Index under New Market Entries

Maurizio Naldi and Marta Flamini

Economic Papers, 2018, vol. 37, issue 3, 344-362

Abstract: The concentration of market power is typically measured by the Hirschman–Herfindahl Index (HHI). When a new company enters the market, the changes in the HHI reflect the change in concentration and may elicit a regulatory intervention. In this paper, we evaluate the potential benefits (HHI decrease) or harms (HHI increase) in advance of the new entry. We identify the volume of sales achieved by the newcomer leading to either situation in two paradigmatic cases: market expansion and market stagnation. We also find the maximum benefit achievable (the minimum HHI value) after the new entry. The formulas are applied to a real‐world case: a merger in the mobile telecom market.

Date: 2018
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