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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

How might advertising make markets less competitive? How might it make markets more competitive? • Give the arguments for and against brand names.

To determine
The effects ofadvertising and branding in monopolistic competition.

Explanation

Advertising may make markets less competitive if it increases consumers’ perception of product differentiation so that they believe in the existence of a greater difference in two similar products. Thus, advertising manipulates consumers’ tastes and preferences and fosters brand loyalty. This makes the demand curve for a product more inelastic, which enables the firm to charge greater markups than marginal cost.

On the other hand, advertising could make markets more competitive by allowing consumers to be better informed about all of the firms in the market. This enables not only consumers to take advantage of price differences more easily, but also firms to compete more vigorously on the price and product quality...

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