Chapter 15, Problem 11P

To determine

Market concentration and advertising expenditure

Concept Introduction:

HHI Index Herfindahl-Hirschman Index is the market concentration index. It is the summation of the squared market share of the firms in the market. A 100% market share defining a monopoly has an HHI of 10,000 and 0% market share defining a perfect competition has an HHI of 0. The HHI index ranges from 0 to 10,000 and it value increases as the market competition increases from monopoly to perfect competition.

Monopolistic Competition - An imperfect market competition where with a large number of sellers selling differentiated product is called the monopolistic competition. It exhibits the elements of both monopoly and perfect competition. The defining characteristics of the market are- It has a large number of firms, relative free entry and exit of firms, product differentiation, imperfect information, transportation costs, inelastic demand and inefficient production.

Oligopolistic Competition - A market structure dominated by a few firms selling homogenous or differentiated products. It is a highly concentrated market structure, where competition takes place in the form of advertising, product differentiation etc instead of price war. The pricing and other strategies of the firms are highly interdependent. The existence of significant barriers to entry and exit of the firms into the market allows the market demand to be catered by a few producers. The market lacks uniformity with the existence of smaller firms too.