Sensitivity Analysis of Herfindahl-Hirschman Index on the Slovak Banking Sector

Herfindahl-Hirschman Index (HHI) that measure the concentration of the industry belongs to well-known special indices. The paper is devoted to the sensitivity of the HHI values, which allows simulations of changes in concentration of the relevant market in case of new entry into the market. Let assume model situation in which a new entity has entered the industry with a relevant market share while keeping the total production of the industry unchanged and the production of subjects operating on the market is proportionately reduced. Based on this assumption, it is possible to derive relations that allow to set the boundaries in which the characteristic of the sector remains the same (levels unconcentrated, moderately concentrated, concentrated on the base of methodology of European Commission). Derived relations of the HHI sensitivity can be successfully used as a tool in assessing the entry of a new subject in any industry. It may be difficult to use analysis based on the methodology of the European Commission in case of smaller economies with a smaller number of subjects. Therefore we proposed our approach of setting of the border ranges to characterize the concentration of the industry. Also, empirical analysis of the Slovak banking sector, in which currently operate 14 banks, was conducted on the basis of the methodology of the European Commission.

Keywords: Sensitivity analysis, Herfindahl-Hirschman index, Industry concentration