Forey, Inc. competes against many other firms in a highly competitive industry.
ID: 1230176 • Letter: F
Question
Forey, Inc. competes against many other firms in a highly competitive industry. Over the last decade, several firms have entered this industry and, as a consequence, Forey is earning a return on investment that roughly equals the interest rate. Furthermore, the four-firm concentration ratio and the Herfindahl-Hirschman index are both quite small, but the Rothschild index is significantly greater than zero. based on this information, which market structure best characterizes the industry in which Forey competes? Explain.Explanation / Answer
monopolistic competition ,there are many firms andconsumers, just as in perfect competition. Thus, concentration measures are closeto zero. Unlike in perfect competition, however, each firm produces a product thatis slightly different from the products produced by other firms; Rothschild indexesare greater than zero. Those who manage restaurants in a city containing numerousfood establishments operate in a monopolistically competitive industry.Afirm in a monopolistically competitive market has some control over the pricecharged for the product. By raising the price, some consumers will remain loyal to thefirm due to a preference for the particular characteristics of its product. But some con-sumers will switch to other brands. For this reason, firms in monopolistically compet-itive industries often spend considerable sums on advertising in an attempt to convinceconsumers that their brands are “better” than other brands. This reduces the number of customers who switch to other brands when a firm raises the price for its product.