Specific measurement of market concentration, that is, of the extent to which a small number of firms account for a large proportion of output. The HHI is used as one possible indicator of market power or competition among firms. It measures market concentration by adding the squares of the market shares of all firms in the industry. Where, for example, in a market five companies each have a market share of 20 %, the HHI is 400 + 400 + 400 + 400 + 400 = 2 000. The higher the HHI for a specific market, the more output is concentrated within a small number of firms. In general terms, with an HHI below 1000, the market concentration can be characterised as low, between 1 000 and 1 800 as moderate and above 1 800 as high.
Source: Glossary of terms used in EU competition policy, Antitrust and control of concentrations, European Commission, 2002