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.
1. Based on this information, which market structure best characterizes the industry in which Forey competes? Explain

Answer 1

Answer:

Forey competes in a Monopolistic Industry.

Explanation:

An industry wit high degree of competition reflects either a perfectly competitive market structure or a monopolistic competitive one. The company in question operates in competition with many other firms in an industry where entry has been easier to allow many firms to enter and operate.

The four-firm concentration ratio and Herfindahl-Hirschman Index are small which suggests absence of concentration.

Rothschild Index for this industry is significantly greater than zero which indicates that this industry cannot be perfectly competitive.

Therefore, the market structure that best characterizes the industry in which Forey competes is a MONOPOLISTICALLY COMPETITIVE one.