Business concentration through the eyes of the HHI

This paper examines the understanding of business concentration through the Her findahl-Hirschman Index (HHI), by showing that this index is conceptually a model according to which this concentration is the consequence of a renewal process. This process is prompted by firms engaging in different types of economic activity as the means by which to vie for market share. The resultant rivalry produces departures between the market shares of firms. These departures ultimately transmit into differing concentration levels attributable only to the economic activity with which firms vie. As a consequence, while the HHI is commonly interpreted to be a screening indicator of market structure, it is in fact first and foremost a screening indicator of market conduct, which incidentally doubles-up as an indicator of market structure. As part of this, the paper shows that while the HHI cannot identify the exact economic conduct that produces the corresponding business concentration of the observed market structure, it does reveal that whatever this conduct is, it is always subordinated to some type of regenerative or revitalising process.