Importance of Advertising for Firms in Monopolistic Competition - Essay Example

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