Herfindahl–Hirschman index level of concentration values modification and analysis of their change

Abstract

The Herfindahl–Hirschman Index (HHI) that measures the level of concentration in a given industry is a well-known and commonly accepted one indicator of market competition. On the basis of European Union Commission guidelines and HHI values, the given industry can be characterized as unconcentrated, moderately concentrated or concentrated. The paper is given over to a sensitivity analysis of HHI values, which allows simulations of concentration changes in relevant markets in order to assess new entries to the market. This paper derives relationships that allow the setting of boundaries in which the characteristic of industry concentration remains the same. Derived relations of HHI sensitivity analyses can be successfully used as a tool in assessing the entry of new subjects into any industry. In the case of economies with a smaller number of operating undertakings, it may be difficult to use the analysis based on the methodology of the European Commission. Therefore, the authors propose an approach of setting boundary ranges to characterize the concentration of the industry. Also, empirical analysis of the Slovak insurance industry, in which 23 insurance companies currently operate, was conducted on the basis of the European Commission methodology.