The paper discussed the importance of advertising for firms in monopolistic competition. Advertising can have two types of effects on demand, either increasing the general demand for the product or altering the distribution of consumers between brands within the product category…
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This paper illustrates that advertising is an important feature of firms that sell differentiated products. Firms found in a monopolistic competition, oligopoly and at times even monopoly market structure practice advertising. Monopolistic competition is a market structure with a large number of firms making a similar product. However, each firm’s product is differentiated from its competitors and hence is unique. An example of such a market structure is fast-food restaurants. Although these fast-food restaurants such as Hardee’s, McDonald’s, Burger King, Subway, Wendy’s and KFC provide the same product, that is, fast-food, however, each of their products has some differentiation which makes it unique from their competitors. An oligopoly is a market dominated by a few large firms. An example of an oligopoly market structure is of cigarettes. Just like monopolistic competition firms in an oligopoly also have differentiated products. Due to this product differentiation, these firms are able to attract customers. Advertising is then done to create brand loyalty. Brand loyalty is the faithfulness of customers to a particular brand expressed through repeated purchases from that brand without coming into the market pressure generated by its competitors. As a result, firms spend heavily on their advertising campaign so that customers stick to their brand and are not won over by their competitors’ brands. Although advertising is necessary to create brand loyalty much also depends on the nature of the product and the elasticity of demand for the product....
However, firms are profit maximizing. Firms advertise because they want to increase the demand for their product and hence their profits. When firms advertise just to increase the demand for its own product then it might hurt the rivals. A firm may use advertising to differentiate its product from its competitors. For example in the case of the fast-food restaurant industry Hardee’s may advertise a different type of burger which is not produced by the other competitors. Such advertising would help Hardee’s to attract customers not only outside the fast-food market but also existing customers of its competitors. This example clearly shows that if Hardee’s is able to advertise its new burger successfully then it will be able to increase the demand for its product leading to higher revenues that will result in a greater profit. Advertising is also done to create barriers to entry so that more firms cannot enter the market and find it hard to compete. For example an existing firm like Coca Cola will advertise to increase its customer base in the soft drink market. Through its advertising campaigns Coca Cola will be able to create brand loyalty. If a new firm wants to enter the soft drink market it would find it very hard to attract customers because firms like Coca Cola have already captured the market and created brand loyalty amongst their customers. Advertising also helps to make the demand for a product relatively inelastic. Once the demand is inelastic the customers buy the firm’s product even when the price of the product rises. A benefit of this inelasticity to the firm is that even if the business is not doing well and profits are low the firm can still generate greater profits by charging its customers a
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Taylor (2007, p. 285) specified that monopolistic competition “occurs in an industry with many firms in free entry; where the product of each firm is slightly differentiated from the product of the other firms.” In the Mankiw (2007, p. 341) perspective, market structure can be classified based on whether one, few, or many firms are in the market; if the market has many firms, market structure can be further identified based on whether differentiated or identical products are sold in the market.
Rival firms in an oligopoly match each other’s price cuts but do not match each other’s price increases. Competition in an oligopoly primarily takes the form of advertising and product differentiation. There are a lot of barriers to entry in an oligopoly like economies of scale, product differentiation and brand loyalty, mergers and takeovers etc (Slomon 174).
The group of companies prior to the merger was individual competitors in a market dealing with the same products. However, after being bought by two lawyers, the environment is bound to change as the competitive market changes in structure. The preceding scenario is an example of an imperfect competitive market referred to as monopolistic competition.
The market structure is characterized by freedom of entry and exit. Monopolistic competition along with oligopoly constitutes the structure of imperfect competition. Firms that are imperfectly competitive offer many products.
This essay focuses on the relative efficiency of the monopolistic competition, certain key characteristics of that type of market, its advantages to producers and customers. It is argued, that the firms operating in monopolistic competition can benefit greatly and reap benefits that it offers, but the customers do not benefit from it necessarily.
As the companies provide almost identical products, competition in the industry centers not only on the price of the products but on other factors as well. Such factors as quality of the products, their promotion and advertising as well as other elements that are not directly related to the price play important part in the industry with monopolistic competition.
Yet there has been an upheaval, in both, which questionably has passed the area where they have common characteristics - competition policy and economic rules - to an extraordinary importance in United Kingdom. The old system for scheming restrictive agreements, the Restrictive Trade Practices Act, lasted some 44 years from 1956 to 2000.
Firstly, a perfect competition situation comprises of a large number of small firms that compete with each other and produce at minimal costs for every unit. Secondly, a monopoly does not have rivals in the industry. It minimizes output to
eir customers, use other raw materials for products production or different packages; offer additional attendant services and products for the customers of the products) and perceived (when companies use advertising to make the customer believe that a product has some additional
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