Question

The accompanying table shows the HerfindahlHirschman 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. Use the information in the table to answer the following questions. $$ \begin{array}{l|r|c} \text { Industry } & \text { HHI } & \begin{array}{c} \text { Advertising expenditures } \\\ \text { (millions) } \end{array} \\\ \text { Restaurants } & 179 & \$ 1,784 \\\ \text { Cereal } & 2,098 & 732 \\\ \text { Movie studios } & 918 & 3,324 \\\ \text { Laundry detergent } & 2,068 & 132 \end{array} $$ a. Which market structure-oligopoly or monopolistic competition-best characterizes each of the industries? b. Based on your answer to part a, which type of market structure has higher advertising expenditures? Use the characteristics of each market structure to explain why this relationship might exist.

Short answer

Answer: Monopolistic competition invests more in advertising, amounting to $5,108 million. This is because firms in monopolistic competition rely more on advertising to differentiate their products and attract consumers, whereas firms in an oligopoly market structure rely more on strategic pricing and output decisions to maintain their market share.

Step-by-step solution

Understanding the Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index (HHI) is a measure of the concentration of a market. It is calculated as the sum of the squares of the market shares of all firms in the market. Higher HHI values mean that the market is more concentrated, while lower HHI values mean that the market is less concentrated. Generally, HHI values below 1,000 indicate monopolistic competition, while values above 1,800 indicate an oligopoly.

Determine the market structure of each industry using HHI values

Using the given HHI values, we can assign a market structure to each industry as follows: - Restaurants: 179 (HHI) - Monopolistic competition - Cereal: 2,098 (HHI) - Oligopoly - Movie studios: 918 (HHI) - Monopolistic competition - Laundry detergent: 2,068 (HHI) - Oligopoly

Compare advertising expenditures between market structures

Based on the advertising expenditures provided in the table, we can summarize the expenditures of each market structure: - Monopolistic competition: Restaurants (\(1,784 million) + Movie studios (\)3,324 million) = $5,108 million - Oligopoly: Cereal (\(732 million) + Laundry detergent (\)132 million) = $864 million This shows that monopolistic competition has higher advertising expenditures (\(5,108 million) than oligopoly (\)864 million).

Explain why monopolistic competition might have higher advertising expenditures

Monopolistic competition is characterized by a large number of firms, differentiated products, and the ability of firms to set their own prices. Due to this, firms in a monopolistic competition market structure will invest more in advertising in order to differentiate their brand and attract consumers to their product. On the other hand, oligopoly is characterized by a small number of firms, homogeneous or differentiated products, and interdependent pricing strategies. Firms in an oligopoly market structure may still engage in advertising to a certain extent, but they also rely more on strategic pricing and output decisions to maintain their market share. In conclusion, monopolistic competition tends to have higher advertising expenditures because firms in this market structure rely more on advertising to differentiate their products and attract consumers.