Question

Monopolistic Competition and Product Differentiation - End of Chapter Problem 11. The accompanying table shows the Herfindahl- Industry HHI Advertising expenditures (milli Hirschman Index (HHI) for the restaurant, cereal, Restaurants 179 $1,784 movie studio, and laundry detergent industries and the Cereal 2,598 732 advertising expenditures of the top 10 firms in each Movie studios 918 3,324 industry. Use the information in the table to answer the Laundry detergent 2,750 132 following questions. a. Which market structure-oligopoly or monopolistic competition--best characterizes each of the industries? Place eacl industry according to the most appropriate market structure, Oligopoly Monopolistic competition Oligopoly Monopolistic competition Answer Bank Movie studios Laundry detergent Cereal Restaurants 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. O Higher advertising expenditures occur in the monopolistically competitive industries. Since firms in monopolistic competition must differentiate in order to earn profits, advertising is a more worthwhile pursuit in more competitive industries. There is no demonstrated connection between market structure and advertising. O Higher advertising expenditures occur in the monopolistically competitive industries. Monopolistically competitive firms have a harder time developing a brand identity than oligopolies. Higher advertising expenditures occur in the oligopolies. Significant advertising can be used as a barrier to entry- new firms will lack the name recognition that incumbent firms will enjoy. O Higher advertising expenditures occur in the oligopolies. Competitors' advertising forces all firms in a concentrated market structure to similarly advertise for fear of losing market power.

Answer 1

The cereal and laundry detergent industries are characterized as oligopolies due to their high HHIs, while the movie studios and restaurant industries are monopolistic competition. Oligopolies have higher advertising expenditures, which serve as a barrier to entry and help maintain brand recognition.

Step-by-step explanation:

To determine the market structure that best characterizes the given industries, we must analyze the Herfindahl-Hirschman Index (HHI) and advertising expenditures data provided. In general, an industry with a high HHI is more likely to be an oligopoly, with a smaller number of firms having significant market share, while an industry with a lower HHI tends towards monopolistic competition, where many firms compete with differentiated products.

Based on the provided HHI:

• Cereal (HHI of 2,598) and Laundry detergent (HHI of 2,750) are characterized by oligopolies due to their high HHI scores, indicating fewer firms with larger market shares.
• Movie studios (HHI of 918) and Restaurants (HHI of 179) exhibit monopolistic competition, with lower HHI scores indicating many firms competing and differentiating their products.

For part b, we observe that oligopolies have higher advertising expenditures compared to monopolistic competition. This can be attributed to the need for maintaining brand recognition and as a barrier to entry in markets where a few firms dominate. Indeed, in an oligopolistic market structure, significant advertising creates a defensive moat around the leading brands. This is contrary to monopolistic competition where, despite the significance of product differentiation, the presence of many firms diffuses the demand for aggressive advertising. Hence, higher advertising expenditures occur in the oligopolies.