Earlier in the week I read an article in the FT, that mentioned PNP Paribas' Investment partners using the Herfindhal-Hirshcman Index to identify industries and sectors where certain companies enjoyed higher levels of market power than others.
I'm toying with the idea of trying to calculate HHI for various sectors to identify those where the constituents face less competition and then using the Stock Ranks on Stockopedia for those sectors to identify potential investments.
I'm just curious to see if any other members use HHI or anything similar in their own approaches.
I've used HHI at work (as a competition economist) but very rarely as it doesn't really tell you anything you can't see in market shares. I see no practical benefit of HHI for investment purposes - it is only meaningful if you properly define a market (a set of closely competing products or services) which is not at all straightforward in the vast majority of cases. HHI of a 'sector' will generally be meaningless as a sector will generally have lots of markets - it will just depend on how you define the sector.
