Fully Explain How Advertising Can Affect Profits in Competitive and Non-Competitive Markets

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This essay is going to examine how advertising strategies used in different market structures affects profits of the firms. This essay is being written based on Advertising, an article by Geoff Stewart, in which he examines “how do firms determine their advertising strategy”. In this article he uses Monopolies as an example of a non-competitive market and Oligopolies as an example of competitive markets, so in this essay Monopolies and Oligopolies will also be used as examples. However other competitive markets include perfect competition and monopolistic competition.

A Monopoly is a market structure characterised by one firm and many buyers, a lack of substitute products and barriers to entry (Pass et al. 2000). An oligopoly is a
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To help explain how profits are made through advertising in a competitive market Stewart uses game theory. Game theory is a technique that uses logical deduction to explore the consequences of various strategies that might be adopted by competing game players (Collins, 2000). Table 1 (Stewart, 2005) is a simple view of two firms that have to choice of advertising or not advertising, if both firms were to advertise there profit would be 1, if one to was to advertise and the other didn’t then the firm who is advertising will get a profit of 3 and the one not advertising will get 0, if they both don’t advertise then they will both make a profit of 2. It is in the interest of the firms to advertise however because there is the possibility of them making more profits than not advertising. The choice to advertise is the firms dominant strategy and firms will always go for their dominant strategy. Table 2 (Stewart, 2005) is used to describe how advertising in a market may increase demand in the market rather than market share. It is still in the firms’ interest to carry out their dominant strategy in this case however it also maximises joint profit in this case. This shows that in a strategic setting, firms profit maximising actions may, but will not necessarily generate profit maximising outcomes (Stewart, 2005).

In conclusion it can be seen that advertising in a monopoly is an effective way to increase profits. This

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