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HHI (Herfindahl-Hirschman Index) Explained w/ Example: YouTube & Competitors' Market Concentration - YouTube
Channel: Benjamin Faust
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[Announcer:] The following is a Benjamin Faust聽
Special Presentation brought to you by Proctor and聽聽
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Gamble. [Faust:] ...the issue being that I admire聽
YouTube but I have to say when you're this big it聽聽
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causes distortions. The Herfindahl-Hirschmann聽
Index or HHI. Referred affectionately by one of聽聽
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my favorite students as the "Her-Hir" index.聽
Try that with me real quick - just flip your聽聽
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tongue back and go "Her-Hir" - "Her-Hir". Very聽
good! This measures market concentration and聽聽
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it does it brilliantly by a simple mathematical聽
computation that even the entry level of students聽聽
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can do with just basic math. Up here real quick聽
I have the four major competitive environments聽聽
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that businesses can find themselves in. You聽
start at the perfect competition which has many聽聽
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competitors and is very consumer friendly and then聽
as we move over towards monopoly there are fewer聽聽
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competitors. Monopoly, in essence, is just one聽
competitor - one seller in the market. And it's聽聽
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not so consumer friendly. Governments are quite聽
aware of this and they take steps to make sure聽聽
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things are in check for the consumer,聽
trying to keep the amount of competition聽聽
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at least somewhat fair so it does not become聽
too concentrated - where the sellers have more聽聽
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and more power to control the market. You might聽
be thinking, "What would be so hard about this?聽聽
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Let's just see who controls the market find out聽
the percentage they control and then list it."聽聽
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The problem with that is as you move from perfect聽
competition closer and closer to monopoly you get聽聽
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to the point where there's an outsize effect of聽
control that the businesses have on the market.聽聽
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To illustrate this I have a list that includes聽
YouTube and its close competitors. Now if you do聽聽
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a search on the internet to find out YouTube's聽
market share you're gonna get varying answers.聽聽
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But if you think about it YouTube provides聽
quite a specific service in a specific way.聽聽
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And for many consumers and content providers聽
it feels to many of them like it's the only聽聽
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real choice. So I settled on some data coming聽
in from the company Datanyze which is measuring聽聽
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[YouTube's] share of the market by the number of聽
websites that use their tools. So although it's聽聽
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not a perfect correlation to their actual market聽
share, I think it's a good proxy to work with聽聽
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for purposes of our activity. Let's first run聽
through this market and look at it without聽聽
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applying the HHI and then we'll go through apply聽
the HHI and do it again so you can kind of see the聽聽
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effect that the HHI has on presenting this kind聽
of data and what it tells us about the market.聽聽
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All right, here I have YouTube and the close聽
competitors of YouTube as well as their market聽聽
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share percentage as done by proxy as I described聽
earlier. Now let's say we wanted to take this data聽聽
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and show how concentrated the market is. We could聽
look at YouTube's number being 74 and say, "Well,聽聽
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that's pretty high." And maybe if we set perfect聽
competition at something like zero and then聽聽
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monopoly at 100 because it has 100 of the market.聽
Um, this market might fall somewhere in here聽聽
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at about 74. But is that the total picture? What聽
about Vimeo which is a second place - distance聽聽
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second - but they still control 20 percent of聽
the market. We really didn't account for that聽聽
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by just taking the largest competitor. What about聽
a situation where you only have three competitors聽聽
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and they all have between 30 and 40 percent聽
of the market? These problems I'm describing聽聽
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are what make the HHI such a great tool to use.聽
I'm gonna put some math on the board. Do not be聽聽
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afraid. I will explain it, we will go through it聽
together. If you've had a certain level of math聽聽
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this may make sense to you. All we're gonna be聽
doing is taking each market share and squaring聽聽
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it. Multiplying itself by itself and then adding聽
them all together from the largest competitor聽聽
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all the way to the smallest competitor. Let's聽
start off with a super easy one. All the "other聽聽
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competitors" in the market. One, we gotta square聽
it so on your calculator one to the second power聽聽
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or you can just type one times one. Super easy,聽
right? What about Brightcove and Flowplayer?聽聽
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Both one, also. What about JW Player and Wistia聽
both have a two percent - share two times two is聽聽
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four. So they both get -- you called it! Vimeo聽
is where it gets a little bit more complicated.聽聽
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19 times 19.. Vimeo's where the calculator really聽
does come in handy. And the big one, YouTube.聽聽
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Yeah, I seem to have got some marker on myself.聽
Occupational hazard. Excellent, so we have our聽聽
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squares done for all of the market percentages.聽
Quick tip: If the market percentages are given to聽聽
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you in a decimal form out of one instead of out聽
of 100 you must move the decimal point to the聽聽
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right two places or multiply by a hundred first聽
to make sure it works. If you do not do this you聽聽
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will get the wrong answer. So according to our聽
formula here we're going to take each competitor,聽聽
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square their market share percentage, and聽
then add them all together. That's what this聽聽
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Greek letter sigma - capital sigma - means. It聽
means we're gonna take a summation of everything聽聽
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so all we have to do now is add all those squares聽
together, sum of the squares. You should have聽聽
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gotten 5848. Let's go ahead and interpret that聽
meaning. Back on our chart where we have perfect聽聽
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competition and monopoly at our two extremes.聽
What if we calculated the HHI for just a monopoly,聽聽
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for a competitor that has 100 of the market聽
share, what would we get? If you said 10,000,聽聽
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you are correct. On the other extreme, what if we聽
are approaching perfect competition. Let's be very聽聽
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generous here because a perfect competition is a聽
bit like a magical fuzzy unicorn, it may not exist聽聽
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in real life. So let's be generous here and say聽
it's less than a hundred. So as you're getting the聽聽
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picture here if the number is low you're likely to聽
have a situation where it's more consumer friendly聽聽
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and the competitors do not have power to kind of聽
control and manipulate the market. However, if the聽聽
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number is high, you're looking at a situation聽
where it's likely damaging to the consumer.聽聽
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So we've got our number 5848. Let's go ahead and聽
interpret that "Her-Hir" number, that HHI number.聽聽
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"Her-Hir". So although we said in a perfect聽
competition environment it would be less than聽聽
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a hundred, here's what you would be looking聽
at if you're maybe a government regulator.聽聽
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Less than 1500 is going to be regarded as a聽
normal competitive market. If you're between聽聽
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1500 and 2500, moderate concentration in聽
the market. And here's the danger zone.聽聽
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Let me get my angry red pen out. Above 2500 on聽
the HHI will be a highly concentrated market聽聽
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that, depending on other factors and depending聽
on the regulations in that particular country,聽聽
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it may be something where the government needs聽
to take action. So where does that put YouTube?聽聽
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Again using our proxy for their market share聽
based on the websites that use their system to聽聽
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present videos, they have a 74 market share with聽
one large competitor, several small competitors,聽聽
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and they have an HHI of over 5000 which makes them聽
in the danger category with a greater than 2500聽聽
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concentration with the HHI. Which makes a lot聽
of sense to me, because i got an interesting聽聽
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email the other day. Now don't get me wrong, I聽
like YouTube, I enjoy making videos for YouTube,聽聽
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and especially since the pandemic I've used聽
it for work, it's been an invaluable tool聽聽
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to help reach my students and present information.聽
That being said, the other day I got a change of聽聽
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terms of service. YouTube, as you know,聽
is basically a media company that sells聽聽
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advertising in order to make a profit. And since聽
they have gone mainstream, they like to, kind of,聽聽
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vet the channels and the videos that their ads are聽
going to appear on because certain brands don't聽聽
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want to be next to controversial content and since聽
that takes some manpower they restrict that to聽聽
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channels that are larger. Smaller channels have聽
to build up to the point at which they are large聽聽
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enough to get that kind of screening from YouTube聽
or they have to simply not have ads and wait.聽聽
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That'll change with this email from YouTube. I'm聽
not going to get it out and read it to you but聽聽
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basically it was -- if your channel is smaller we聽
still might run ads on it. Let me translate that聽聽
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for you. That means we now have technology that聽
makes it more efficient for us to find videos that聽聽
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are profitable and acceptable for our advertisers聽
in order to make more money, but we're not going聽聽
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to share it with you. And, quite frankly, that's聽
the kind of stuff that the HHI tells us. They are,聽聽
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for many of us, like i said kind of in my teaser聽
intro, they're the only people who do what they do聽聽
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in the way that they do that have people there聽
to watch. And so when YouTube wants to make a聽聽
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change in terms that upsets smaller channels they聽
can and will. Because, I'm telling you right now,聽聽
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they're too big, I've invested too much time in聽
them, I have so many videos -- both private and聽聽
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public -- on there that i'm not about to migrate聽
to another platform. They have a tremendous amount聽聽
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of power in the market, especially when it聽
comes to their content creators. And of course聽聽
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my channel is smaller and it upset me a little聽
bit. But I always had in the back of my head聽聽
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that even though I'm smaller at least there won't聽
be ads for my students or other people on there聽聽
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since I am smaller. But since that's all聽
changing, I have to tell you being who I am,聽聽
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I went through my contacts made a few phone calls聽
to Cincinnati, Ohio, and got myself a sponsorship.聽聽
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That way I kind of get ahead of this terms of聽
service thing for YouTube, right? So, of course,聽聽
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I want to endorse Dawn dish detergent from聽
Proctor and Gamble. This stuff is great. I聽聽
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use it to clean my glasses. I use it to clean my聽
dishes when I don't feel like doing the dishes聽聽
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in the dishwasher. I even use it to make bubble聽
bath in my bathtub. But I would not recommend聽聽
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getting any water in your eyes if you're gonna聽
do that, just an aside there. And, you know,聽聽
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I was a vegetarian full on for three years.聽
And so I'm into some natural stuff and some聽聽
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natural remedies. And if you'll notice here, they聽
have ducks on their label. And I just love that聽聽
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they have ducks because it's homeopathic. You聽
see, Dawn is great about cutting through grease聽聽
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when you are washing the dishes, if you have a聽
really messy dish or a really messy pan. Great聽聽
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at cutting through the grease and that's because聽
ducks are very oily birds. And so what they do,聽聽
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sorry to say for the ducks, they grind them up聽
and the little particles of ducks are in Dawn dish聽聽
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detergent - it's homeopathic - everybody wins!聽
So make sure next time you're at the supermarket聽聽
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or your favorite discount store or even ordering聽
online that you look for the name Dawn. Don't go聽聽
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for imitations. If your dish messes have聽
you feeling unlucky, look for the ducky!
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[Dear Friend, Social media is an awesome tool that聽
is also highly problematic. Please be judicious.聽聽
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You can find my content on聽
the following platforms:聽聽Facebook, YouTube. Signed, Benjamin Faust
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Facebook, YouTube. Signed, Benjamin Faust]
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