If an industry consists of 20 firms holding equal market shares, the Herfindahl index is

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The Herfindahl index is calculated by summing the squares of the individual market shares of all firms in the industry. If each of the 20 firms holds an equal share, each has 5% of the market (100% / 20 = 5%). The square of each firm's market share is 0.05^2 = 0.0025 or 25 when expressed as a whole number (since the Herfindahl index is often expressed in terms of "points" out of 10,000). Multiplying this by the number of firms (20) gives 20 * 25 = 500.

If an Industry Consists of 20 Firms Holding Equal Market