The accompanying table shows the Herfindahl-Hirschman Index (HHI) for the restau
ID: 1125425 • Letter: T
Question
The accompanying table shows the Herfindahl-Hirschman Index (HHI) for the restaurant, cereal, movie and laundry detergent industries, as well as the advertising expenditures of the top 10 firms in each industry in 2006. Use the information in the table to answer the following questions: Industry Restaurants Cereal Movie Studios Laundry Detergent HHI 179 2,098 918 2,068 Advertising Expenditures (Millions) $1,784 732 3,324 132 Which market structure-oligopolistic or monopolistic competition-best describes each market structure? Why? Based on your answer to part a), which type of market structure has the highest advertising expenditures? Use the characteristics of each market structure to explain why this relationship might exist, a) b)Explanation / Answer
Answer:
a) According to Justice Department guidelines, an HHI below 1,000 indicates a strongly competitive market, an HHI between 1,000 and 1,800 indicates a somewhat competitive market, and an HHI over 1,800 indicates an oligopoly. So you should expect monopolistically competitive industries to have an HHI below 1,000 and oligopolies to have an HHI above 1,800. So the four industries are: Restaurants: HHI below 1,000—monopolistic competition Cereal: HHI over 1,800—oligopoly Movie studios: HHI below 1,000—monopolistic competition Laundry detergent: HHI over 1,800—oligopoly.
b) Based on the above table, restaurants and movie studios, which fall in the category of monopolistic competition, has the highest advertising expenditures.
However, we know that industry with monopolistic competition faces very much stringent competition. Thus in order to survive and fight the competition , the industry takes the help of intensive advertisement policies.
We know from the characteristics of monopolistic competition that -
i. The market structure has large number of sellers and large number of buyers.Hence there exists competition.
ii. But the competition is based on product differentiation and faces a downward sloping demand curve, where
iii. The economic profits are zero because of free entry to the market.
( Economic profits are; positive when P > Average Total Cost ; negative when P < Average Total Cost and zero when P= Average Total Cost ) .
Thus in order to survive the restaurants and movie studios promotes their differentiated product or variety ,say, Chinese, Harry Potter, etc, from other products of same categories i.e., of food or movies. Thus in order to survive in the market and continuously remain in competition, huge expenses on advertisement is necessary for the industries in the monopolistic competitive market.
Similarly we could understand the scenario for the other market structure as well.
The cereal and laundry detergent industry has oligopolistic competition. In such a market structure , i,e. of oligopoly market, the number of sellers are very few which drives out the feeling of competition at first. Thus the producers or the industry does not require huge expenditure on advertisement to let people know of their products. Very few sellers, ensures the probability that the cereal or laundry detergent products will easily be sold in the market.
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