Final answer:
Economic measures of competitive advantage compare a firm's level of return to its cost of capital. The four-firm concentration ratio and HHI estimate market concentration rather than directly measuring competition. Firms seek outside investment to supplement profits and support growth.
Step-by-step explanation:
The student's question pertains to how economic measures of competitive advantage are determined by comparing a firm's level of return not with the average return of the industry, but rather with the firm's own cost of capital. The four-firm concentration ratio and the Herfindahl-Hirschman Index (HHI) are two tools used to gauge competition within an industry, yet they do not directly measure the amount of competition. Instead, they provide an estimate of market concentration by looking at the largest firms' market shares (four-firm concentration ratio) or by summing the squares of all firms' market shares in an industry (HHI).
As for why firms need outside investors even when they have profits, it's important to understand that reinvesting profits is only one way to secure financial capital. Access to outside investment allows firms to pursue opportunities that may require more capital than is available from profits alone, thereby supporting more substantial growth and development.