“In markets characterized by many producers producing related but differentiated
ID: 1106878 • Letter: #
Question
“In markets characterized by many producers producing related but differentiated products, advertising by firms in the market increases competitive pressures that tend to reduce profits to risk adjusted normal levels in the long run. However, in markets dominated by relatively few very large producers with established brands, advertising expenditures are used strategically in attempts to reduce price competition and maintain above normal rates of profit in the long run.” Agree or disagree with this statement and explain your answer in detail. That is: Explain the effects of advertising on prices and competition among firms in monopolistic competitive markets and in oligopoly markets dominated by a few large producers with established national brand names.
Explanation / Answer
Advertising is a way of telling people about your firm and product. By advertising people get to know what are the qualities of your product and how is it different from other products in the market.for example: luxottica, it is the biggest glass manufacturing company who sells their products to major companies like ray ban, vogue etc.
Advertising in monopolistic competition:
Advertising can be done through various platforms, for example, social media, radio, television etc. Advertising increases the demand of the product and sometimes it also increases the cost of the product. The increased demand and increased prices helps the firm in earning more profits. It causes the demand curve of the product to shift to the right. In monopolistic competition the efforts made by the firms to attract the attention of the public from each other will have the same results even if they have not done anything to attract the public.
Advertising in oligopoly markets:
Oligopolists have enough finances to advertise their product in the market. Oligopoly is also similar to monopolistic market as there are very few competitors. Now, these firms will try to advertise their product in a manner that proves that their product is better form their competitor's. Also the firm will try to keep the prices marginal in an order to attract people's attention. In this the consumer is at benefit, because between this competition of firms the consumer variety of goods at lower prices. example of oligopoly are:Apple iOS and Google Android dominate smartphone operating systems, while computer operating systems are dominated by Apple and Windows.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.