The accompanying table shows the Herfindahl-Hirschman Index (HHI) for the restau

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: 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,

Explanation / 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. The monopolistic market sturcture has the highest advertising expenditures.

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