Q1. Forey, Inc., competes against many other firms in a industry. Over the last decade, several firms have entered this industry and, as consequences, Forey is earning a return on investment that roughly equals the interest rates. Furthermore, the four-firm concentration ratio and Herfindahl Hirschman index are both quite small. Based on this information, which market structure best characterizes the industry in which Forey competes? Explain the characteristics this market structure and what happens to the Forey Inc’s profit in the short- run and long-run. SOLUTION: Based on information provided, perfectly competitive market structure best characterizes the industry in which Forey competes, because its returns decrease with the entering of new firms, also four-firm concentration ratio and Herfindahl Hirschman index are both quite small, so no one has significant market power to set or even influence the market price. In the short-run Forey Inc’s profit will decrease as more and more new firms enter the market and in the long-run Forey Inc will receive only normal (zero) economic profit. Since its monopolistic competition because in this kind of market structure there are many firms and just as in perfect competition, but the only difference being that in monopolistic competition, each firm produces a product that is slightly different from the pro ducts produced by other firms. A firm in this market has some control over prices. Monopolistic competition characteristics: There are large number of firms There is freedom to enter or leave the market, as there are no major Barriers to Entry or exit. Each firm makes independent decisions about price and output, based on its product, its market, and its Cost of production . A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation: 1 Physical product differentiation, where firms use size, design, colour, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated. 2 Marketing differentiation, where firms try to differentiate their product by distinctive packaging and other promotional techniques.
You've reached the end of your free preview.
Want to read all 8 pages?