Report of the Working Group on Petroleum & Natural Gas Sector for the XI plan
Annexure IV - Herfindahl-Hirschman Index (HHI)
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- Annexure V - Year Wise, Product Wise Comparison of Actual X Plan Projections
Annexure IV - Herfindahl-Hirschman Index (HHI)Herfindahl-Hirschman Index (HHI) A competitive market is one with a sufficiently large number of firms competing with one another that prices are kept at levels that reflect social costs. Since market power usually leads to high prices and/or low quality, and often stifles future innovations, it hurts consumers and should be restricted. There are numerous ways to obtain market power. If there are only a few firms in a market, so concentration is high, then each firm will have some market power to charge a high price. When the market is highly concentrated, it is also easier for firms to coordinate their pricing behaviour so a high level of prices can be maintained. Market power may also exist even with many small firms in the market, when there is a dominant firm. A common way of obtaining more market power is through mergers and acquisitions. In merger analysis, the next step would be to calculate market shares of the parties involved and the concentration level of the market. When measuring concentration, the Herfindahl-Hirschman Index (HHI) is often used by the US antitrust agencies. The HHI is the sum of the squared market shares of all the participants. For example, if there are three firms in the market, with market shares 50 percent, 30 percent, and 20 percent, respectively, then the HHI is: 50^2+30^2+20^2=3,800. As a result, a monopoly market has an HHI equal to 10,000. A competitive market has an HHI that is low. Unlike other indexes (for example, the four -firm concentration ratio), the HHI assigns greater weights to the market shares of the larger firms, in accord with their relative importance in the market. A market is characterized as unconcentrated (HHI below 1,000), moderately concentrated (HHI between 1,000 and 1,800), and highly concentrated (HHI above 1,800). To get a sense of these thresholds, an HHI of 1,000 corresponds to ten firms of equal size, and an HHI of 1,800 corresponds to five and half firms of equal size. Although the exact numerical cut-off does not have precise justifications, it provides a broad framework for further analysis. In practice, the US antitrust authorities change in the HHI from the pre-merger level is very dramatic and there is other evidence that suggests that a post-merger price increase is likely. Such analysis linking market concentration to market power is often called structural analysis. Antitrust analysis has evolved over time with the development of economic theories and empirical methods. Annexure V - Year Wise, Product Wise Comparison of Actual & X Plan Projections
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