The Herfindahl–Hirschman Index, HHI

[Lafayette]

From here: Is Lack of Competition Strangling the U.S. Economy?

Quote:
The troubling effect of industry consolidation and other forces on productivity, wages, and income inequality ...

Summary:

There’s no question that most American industries have become more concentrated. Economists are trying to understand whether this is necessarily a bad thing for competition.
The short answer: It’s complicated. Innovation superstars like Google have created winner-take-most markets largely by exploiting network effects, not through predatory behavior. However, research from the wider economy (including the tech sector) uncovers classic signs of unhealthy concentration: rising profits, weak investment, and low business dynamism.

The government’s approach to antitrust violations is due for an overhaul. And regulators need to pay more attention to protecting economic vitality and consumer well-being — and less to industry lobbyists.

Reference: Industrial Concentration
Summary:

Industrial concentration” refers to a structural characteristic of the business sector. It is the degree to which production in an industry—or in the economy as a whole—is dominated by a few large firms.

Once assumed to be a symptom of “market failure,” concentration is, for the most part, seen nowadays as an indicator of superior economic performance. In the early 1970s, Yale Brozen, a key contributor to the new thinking, called the profession’s about-face on this issue “a revolution in economics.” Industrial concentration remains a matter of public policy concern even so.

Industrial concentration was traditionally summarized by the concentration ratio, which simply adds the market shares of an industry’s four, eight, twenty, or fifty largest companies. In 1982, when new federal merger guidelines were issued, the Herfindahl-Hirschman Index (HHI) became the standard measure of industrial concentration ...

Herfindahl–Hirschman Index - Wikipedia

The Herfindahl index (also known as Herfindahl–Hirschman Index, HHI, or sometimes HHI-score) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also technology management. It is defined as the sum of the squares of the market shares of the firms within the industry (sometimes limited to the 50 largest firms), where the market shares are expressed as fractions ...

The United States federal anti-trust authorities such as the Department of Justice and the Federal Trade Commission use the Herfindahl index as a screening tool to determine whether a proposed merger is likely to raise antitrust concerns. Increases of over 0.01 generally provoke scrutiny, although this varies from case to case. The Antitrust Division of the Department of Justice considers Herfindahl indices between 0.15 and 0.25 to be "moderately concentrated" and indices above 0.25 to be "highly concentrated"

 

[Lafayette]

AND THE CONCENTRATION OF INDUSTRIES

Excerpt:

Concentration in the U.S. Economy
According to the U.S. Department of Justice’s merger guidelines, an industry is considered “concentrated” if the HHI exceeds 1,800; it is “unconcentrated” if the HHI is below 1,000. Since 1982, HHIs based on the value of shipments of the fifty largest companies have been calculated and reported in the manufacturing series of the Economic Census.1 Concentration levels exceeding 1,800 are rare. The exceptions include glass containers (HHI = 2,959.9 in 1997), motor vehicles (2,505.8), and breakfast cereals (2,445.9). Cigarette manufacturing also is highly concentrated, but its HHI is not reported owing to the small number of firms in that industry, the largest four of which accounted for 89 percent of shipments in 1997. At the other extreme, the HHI for machine shops was 1.9 the same year.

Whether an industry is concentrated hinges on how narrowly or broadly it is defined, both in terms of the product it produces and the extent of the geographic area it serves. The U.S. footwear manufacturing industry as a whole is very unconcentrated (HHI = 317 in 1997); the level of concentration among house slipper manufacturers is considerably higher, though (HHI = 2,053.4). Similarly, although the national ready-mix concrete industry is unconcentrated (HHI = 29.4), concentration in that industry undoubtedly is much higher in specific cities and towns that typically are served by only a handful of such firms.

These examples suggest that concentration varies substantially across U.S. industries. Trends in concentration vary from industry to industry, but most changes in concentration proceed at a glacial pace. So, too, does aggregate concentration: the fifty largest U.S. companies accounted for 24 percent of manufacturing value added (revenue minus the costs of fuel, power, and raw materials) in 1997, the same percentage as in 1992 (and as in 1954, for that matter). On some measures—the percentages of total employment and total assets controlled by the nation’s 50, 100, or 200 largest firms—industrial concentration in the United States actually has declined since World War II.

Concentration indexes calculated for a particular year conceal the identities of the industry’s members. In reality, turnover among the nation’s leading firms is fairly regular over long time horizons, averaging between 2 and 5 percent annually. Success at one point in time does not guarantee survival: only three of the ten largest U.S. companies in 1909 made the top one hundred list in 1987. Available concentration indexes, which are based solely on domestic manufacturing data, also ignore the global dimensions of industrial production.

The Causes and Consequences of Industrial Concentration

Some industries are more concentrated than others because of technical properties of their production technologies or unique characteristics of the markets they serve. Economies of scale, which allow firms to reduce their average costs as they increase their rates of output, favor large-scale production over small-scale production. Thus, industries for which scale economies are important (e.g., auto manufacturing and petroleum refining) are expected to be more concentrated than others in which costs do not fall as rapidly as output expands (e.g., cut-and-sew apparel manufacturing).

Interesting subject and not sufficiently treated by economic researchers in the US. There has been far too much market-concentration as promoted by buy-outs AND the fact that a lot of higher-cost manufacturing propelled a lot of American companies to obtain lower production-costs in Central America.

Look, let's make it plain. A Country Cannot Have Everything! Not a strong economy AND cheap products from China/Central America pushing labor-based production outside the US. American workers go on the dole and some somber in lifetime unacceptable pay-scale employment ...