On the Concept of Market Concentration, the Minimum Herfindahl-Hirschman Index, and Its Practical Application

Abstract

The paper analyses the phenomenon of market concentration in the context of the most popular industrial organization approaches: the struc- ture-conduct-performance (SCP) approach and the efficiency hypothesis (EH). The theory of market concentration evaluation is briefly presented, followed by an analysis of the main concentration indicators and their application in recent empirical research. The main problem in the practical application of the Herfindahl-Hirschman index (HHI) – the necessity to incorporate the market shares of all the enterprises in the market – is further addressed and the issue of calculating the minimum value of the HHI is analysed from the theoretical point of view and by modelling hypothetical markets.

Key words: Market structure, Market concentration, Herfindahl-Hirschman index (HHI).
JEL: D21, D22, D40, D42, D43, D47.