Monopolistic competitors advertise because they are so sure you will buy their product. It is a fact that monopolies exist in the world of business, which leads to monopolistic competition. This article will discuss monopolistic competitive advertising and how it can benefit your business.
Role of Advertising in Monopolistic Competition
Monopolistic competition is characterized by numerous firms selling varied goods. Monopolistic competition businesses use advertising to create product differentiation. In monopolistic competition, the aim of product distinction and advertising is to ensure that the market is stable, resulting in a higher price.
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Excessive promotion will disclose to customers about the physical distinction between the products and, as a result of their perception, product differentiation. The firm would charge a higher price if advertising in the long term convinces clients that its product is better than its competition’s (Arnold 241).
What is the role of advertising for monopolistically competitive companies? Demand will be boosted and demand elasticity will be reduced as a result of advertising. At a price P, Q delivers the current profit-maximizing output at a short run equilibrium graph. As shown on the short-run equilibrium graph, this means that Q boosts the quantities of the product consumers are willing to buy, causing demand to shift or move up along the curve.
The new demand curve will be higher in quantity demanded and lower in price (Arnold 245). As a result, advertising plays an important role in monopolistic competition. In monopolistic competition, because the company faces a relatively elastic demand, prices may only be as high as necessary to cover variable costs. The demand curve will be more vertical to reduce demand elasticity; therefore, consumers are likely to alter their consumption levels as a consequence of a change in price.
When faced with inelastic demand, a monopolistically competitive firm cannot maximize profit because the marginal revenue (MR) is negative, implying that the marginal cost (MC) would be negative. The firm can now charge a somewhat greater price P1 for the same quantity, allowing it to earn more money for each selling amount Q at a profit-maximizing level of output (McConnell and Brue 494). A monopolistically competitive business, on the other hand, can’t maximize profits when confronted with inelastic demand since the marginal revenue (MR) is negative; this implies that the marginal cost (MC) would also be negative.
Given that MR and MC are both negative, such a scenario is not realistic (Arnold 246). Inelastic demand can be caused by excessive advertising, and the firm will need to raise the price in order to make demand elastic because profit isn’t maximized when demand is inelastic. (McConnell & Brue 489).
The company will continue to advertise as long as the advertising income exceeds the cost of advertising. Monopolistic rivals promote due to the potential for demand growth and inelasticity, and while marginal costs (MC) and average costs (AC) are likely to go up at the same time, demand may nonetheless grow.
Monopolistic competition is characterized by excessive advertising, and it may not result in losses as long as revenues per product are greater than an increase in average cost per product. Easy access to firms in a monopolistic competition market is one of the features. Firms in a monopolistic competition market will employ advertising to keep their profits since adverts influence the goods produced by the company and thus boost demand for them.
Advertising in Oligopoly
The big firms can grow their market share through advertising, and they compete on the basis of advertising rather than price (McConnell and Brue 492). The Oligopolist’s excessive marketing is used as a deterrent to new entrants. It’s also used to notify customers about new goods that have recently been introduced into the market. Oligopoly promotion, on the other hand, results in greater output, pushing down the ATC curve toward the productive efficiency point where the average total cost (ATC) is lowest. Advertising may also be used to distort rather than inform consumers.
Oligopoly is a market structure in which there are a few firms that provide comparable products and services. One distinguishing feature of oligopoly is mutual dependency. The game theoretical approach is used as depicted in the Diagram, and it shows that the two businesses would be better off cooperating than competing. Both may make 200 dollars profit each if they advertise at the top left; if neither does, the two may make 250 dollars each in the lower right quadrant because there are no advertising costs (McConnell and Brue 496). Firm B decides to advertise at the lower-left quadrant, whereas firm A does not do so, resulting in firm B earning 350 dollars in profits and firm A earning 100 dollars. This is due to the fact that advertisements bring consumers from firm A to firm B.
For example, if firm A decides to advertise and firm B does not, this means that customers will migrate toward firm A. Customers would favor company A over company A if the two businesses colluded and advertised since B does not promote while firm A thinks about advertising. If both firms agreed to collaborate and advertise, customers would flock to business A instead of flocking away from it as depicted in the bottom left quadrant.
In an oligopoly, there are a few significant competitors in the market, and each alone is unable to fully influence the market unless they collaborate to affect and influence price and demand. Oligopolists’ use of advertising raises both their company share and overall demand. In order to increase its market share, an Oligopolist will engage in fierce marketing rivalry in order to outdo each other. (McConnell and Brue 494). Advertising in the oligopolistic markets is thus very expensive. It’s tough to know whether advertising improves consumer benefits and efficiency. If advertising increases revenues and production, it might help the firm’s efficiency.
Advertising is expensive, and if costs are less than the revenue gained from sales, it might improve efficiency. In monopolistic competition and oligopoly, advertising may have little bearing on the consumer’s benefit. Customers, nevertheless, will gain some benefits if more sales owing to advertising result in lower prices (McConnell and Brue 487).
A monopolistically competitive market is a market structure that combines aspects of pure competition and monopoly. The firms create a somewhat distinctive product that might be near substitutes but are not perfect substitutes, with all firms competing for the same clients. As a result, the businesses don’t compete on price as much as they compete to emphasize their product’s value-added characteristics in order to distinguish it from others in the marketplace.
The firms in monopolistic competition are known as “Price Makers” since each has its own product and is not compelled to take the market price. Individual firms’ prices and output quantities are determined by their decisions, while “Cost Production” is responsible for the pricing and production processes utilized by the firms. Individual firms may, however, utilize industry prices as a guide while selecting production methods and materials. The following are some of the characteristics of a monopolistic competitive market: A large number of sellers: (Nokia, Samsung, LG, Motorola, HTC, Apple, Sony, Blackberry) Small market share: Each firm has a very small percentage of the overall market.
As shown in the graph below, most of the mobile platform market is controlled by firms using Android operating system. Mobile Platform Market Share. Mobile Platform Market Share. There Is No Collusion: Because there are so many businesses, it’s unlikely they’ll work together to limit outputs and set prices. Price-fixing isn’t attempted through collaboration. Each firm has its own pricing strategy based on its output and expenses.
Independent Action: Each company is free to set its pricing strategy without regard for competitors. For example, lowering the price of goods might improve sales, but it would have little influence on rivals’ sales. When Apple releases a new iPhone model, the previous one will almost always be discounted. This is not because of competition, though.
Differentiated products: Each mobile phone company has its own set of features to distinguish their phones from rivals. Product Attributes: Physical or qualitative differences in the items themselves may be included as product differentiation. The important aspects of product distinction are real functional distinctions, materials, design, and workmanship.
Each cell phone company aims to personalize their product in its own way. Apple has its own proprietary operating system (IOS), whereas Samsung utilizes the Droid OS. The Apple operating system is only accessible on iPhone devices, but the droid operating system is utilized by a number of firms (HTC, Motorola, Samsung, and Sony). Service is another type of non-price product differentiation that occurs beyond the purchase process.
Apple’s service is also unique. The service is available in a company-specific store called “Geniuses” that is run by representatives known as “Geniuses.” Location: Stores that sell specific products or the placement of items in stores. Brand Names and Packaging: Brand loyalty and packaging can influence demand. iPhone is Apple’s smartphones. It’s basically the same as any other phone, with the exception of the apple brand and marketing, which make it a big hit on the market for cell phones.
Producers have some control over pricing. Producers can charge extra for extra features, for example. Because each firm owns such a tiny piece of the overall market, firms are generally referred to as “price makers.” To maximize profits, monopolistic competition businesses will DIFFERENTIATE their products and make them more appealing to customers.
Easy entry and exit from the industry:
In the SHORT RUN, a firm can either earn economic profits or suffer losses. Because there are few barriers in place to prevent firms from entering or leaving the sector, long-term, businesses will only profit. Keep in mind that profits are lost when you start up; likewise, losses are eliminated when you close down!
A monopolistic competitive market has product distinctions, which is a special characteristic. The goal of product differentiation and marketing (non-price competition) is to make price less important in consumer purchases and to give differences between goods a greater role. A successful ad would shift the company’s demand curve to the right, making demand more elastic.
Monopolistic competition in the cell phone market is based on offering distinct items in the consumers’ minds. Monopolistic competition must utilize advertising to engage in differentiation creation. The use of advertisements aids in the development and maintenance of product distinction in the market. Effective promotion serves to bring consumer attention to a product’s distinctive features, driving company income.
The cell phone market is an excellent illustration of a monopolistic competitive market, with each company attempting to differentiate their devices through various means. iPhone5 and Samsung Galaxy III are two examples. Both firms utilize “Physical product differentiation,” in which size, design, color, form, performance, and features are used to distinguish their goods. Then the businesses employ the “marketing distinction,” such as promotional approach or packaging, to entice customers.
Samsung has a unique technique to grow its brand that it hopes will set a new precedent for future phone manufacturers. It also uses the biggest smartphone maker in the world as a marketing tool, according to The New York Times. Meanwhile, Samsung and other big electronics companies can control supply (production and number of goods distributed in specific areas) and so may raise prices, which is generally the case when Max Price: P = P x Q is reached at first launch in the market. When Samsung launched the Galaxy, it cost approximately $200 more than you can now purchase it at a store.
The initial profit maximization is MC = MR, which explains why it costs $1.20 each gram when compared to other brands. This was due to the fact that when it initially entered the market, consumers were ready to pay a high price, resulting in AR exceeding ATC and MR. And with time, Samsung lost its competitive advantage owing to the ease with which competitors may come up with substitutes. The P=AR equation has now been solved at this point (minimum ATC).
The industry of cell phones, for example, is almost entirely dependent on technological innovation. However, there are no barriers to entry or exit in the market. Manufacturers may profit short-term by meeting consumer demand while their rivals create comparable items. Finally, earnings and demand are realized in the long run as a result of new technology products with superior functionality entering the market (P=AR=min ATC).
The cell phone manufacturers, on the other hand, have historically had a manufacturing inefficiency because they may never fully utilize their fixed characteristics when creating the new product. That is due to the fact that in order to maintain their competitive edge and supernormal earnings at the same time, they must preserve their innovation.
Monopolistic competition is a market structure that combines features of monopoly and competitive markets. A monopolistic competitive market is one with free entry and exit, but firms may distinguish their goods. As a result, they have an inelastic demand curve and are able to set prices. Because there is no restriction on the number of firms that can enter the market, supernormal profits would encourage additional businesses to join, resulting in normal profits in the long run.
The short-run equilibrium of the firm under monopolistic competition: The firm maximizes profits and output, while keeping total costs constant.
The firm may compute a price based on the average revenue (AR) curve. The total profit is the difference between each firm’s average revenue and average cost, multiplied by the quantity sold (Qs).
Monopolistic Competition Long Run
The long-run equilibrium of the firm under monopolistic competition is as follows: The firm still produces where marginal cost and marginal revenue are equal; nevertheless, the demand curve (and AR) has shifted because other firms have entered the market and increased competition. The firm no longer sells its products at a premium above average cost, suggesting that it may not be making an economic profit.
Firms in this category sell items that are said to or considered to have non-price differences. The distinctions, on the other hand, are not so great as to render alternative goods useless as substitutes. Cross price elasticity of demand between items in such a market is defined technically as positive. In reality, the XED would be very high. MC products are best characterized as close but imperfect substitutes. The products provide the same basic functions but differ in terms of quality (type, style, quality), reputation (reputation), appearance (appearance) and location (location).
The core function of motor vehicles, for example, is to transport people and goods from A to B in reasonable comfort and safety. However, there are many distinct sorts of motor vehicles available, including motor scooters, motorcycles, trucks, automobiles, and SUVs. Within these categories there are numerous variations.
Free entry and exit:
There is no entrance or exit fee in the long term. There are many new businesses eager to get into the market, each with its own “distinct” product or in search of positive earnings, and any firm unable to cover its expenses can leave the market without incurring liquidation costs. This assumption implies that there are minimal startup expenditures, no sunk expenses, and no exit fees. The cost of entry and departure is very low.
Independent decision making:
Each MC company dictates its own terms of trade for its goods. The firm gives no thought to how its choice may affect rivals. According to the logic, any action has such a minimal impact on overall market demand that an MC company can take action without worry of causing increased rivalry. In other words, each firm feels unconstrained in setting prices as though it were a monopoly rather than an oligopoly.
Because of market dominance, some MC firms have some degree of exchange marketplace power. Market power refers to the ability to control the terms and conditions under which transactions occur. An MC firm may increase its prices without losing all of its clients. The company can also cut costs without triggering a price war with rivals. Market domination is not due to barriers to entry, which are restricted.
Market power, rather, refers to the ability of an MC firm to set prices and decide on product improvements without fear of competition. An MC firm has market power because it has a small number of competitors that do not participate in strategic decision-making, and its products are differentiated. Market power also implies that an MC company has a downward sloping demand curve. The demand curve is quite elastic, but it is not “flat.”
The market structure in the MC industry includes two inefficiencies. First, at its peak output, the firm charges a price that is greater than marginal costs; this implies that p = MC for the MC firm. This implies that when the demand curve of an MC firm is downward sloping, it will be charging a price that is greater than marginal costs. Because an MC company has monopoly power, when it reaches profit-maximizing levels of production there will be a net loss of consumer (and producer) surplus.
The second cause of inefficiency is that MC businesses operate with excess capacity. That is, the MC company’s profit-maximizing output is less than or equal to the quantity produced at minimum average cost. A PC and an MC firm will reach a point where demand or price equals average costs when both are operating at full capacity. When a PC firm’s perfectly elastic demand curve equals its minimum average cost, it is in an equilibrium position. A downward sloping demand curve is seen in a MC firm. As a result, the demand curve will be tangential to the long-run average cost line at a point to the left of its lowest. Excess capacity results as a consequence.
Monopolistically competitive firms are often inefficient, but the expenses of regulating price for each product that is sold in monopolistic competition generally outweigh the benefits. However, it need not regulate every item and every firm; only the most essential ones would be regulated. That alone would represent an improvement on the present state. A monopolistically competitive company may be considered to be marginally wasteful because its output occurs where average total cost is below zero.
Because marginal cost is lower than price in the long term, a monopolistically competitive market structure is productively inefficient. Monopolistically competitive markets, on the other hand, are allocatively efficient. Better fulfilling people’s demands than homogeneous goods in a perfectly competitive market, product diversity increases total utility.
Monopolistic competition, according to some theorists, promotes advertising and brand names. Advertising encourages consumers to spend more on things because of the name associated with them rather than due to rational reasons. Defenders of advertising dispute this, stating that brand names provide a guarantee of quality and that advertising aids in the reduction of expenses for customers by allowing them to compare numerous competing brands.
Choosing a brand in an industry with many competitors has special information-gathering and processing costs. In a monopoly market, the consumer is faced with only one brand, making information gathering relatively simple.
When there are many brands to choose from in a competitive market, consumers may be overwhelmed. However, when the products are nearly identical, information gathering is also straightforward. In monopolistically competitive markets, consumers must collect and evaluate information on a large number of distinct brands in order to pick the finest of them. The cost of obtaining knowledge needed to select the best brand may exceed the benefit of consuming the greatest brand rather than picking one at random.
As a result, the consumer is perplexed. Some products acquire market value and can be charged an extra fee for it. Advertising may assist customers in determining which brands are superior to others based on their own experience of consuming them.
The process of brand switching in the duopoly market with many vendors is different. For example, Mr Chamberlin noticed that in a marketplace with many sellers, individual firms’ products aren’t at all similar, such as soaps used for personal hygiene. Each brand has its own set of features, including packaging design, fragrance, and appearance, despite the fact that all are made up of similar components. This is why each brand is sold on the market separately.
This demonstrates that each brand is highly unique in the eyes of customers. The success of the specific brand may be attributed to long-term usage and heavy advertising. According to Joe S.Bain, ‘Monopolistic competition exists when there are a large number of sellers selling varied but close substitutes.’ Consider Liril and Cinthol as an example. Both are soaps for personal care, however they have distinct names.
Under monopolistic competition, the firm has some control over price since it can differentiate itself from its rivals. Because of distinction, a business will not lose all of its clients when it raises its price. Monopolistic competition is characterized as a combination of perfect competition and monopoly because it combines the qualities of both perfect competition and monopoly. It is similar in spirit to a perfectly competitive market, but because products are differentiated, businesses have some control over prices.
The following are the essential characteristics of monopolistic competition: A large number of sellers: In a monopolistic market, there are a lot of merchants selling a product, but each vendor acts independently and has no influence on the others. nA substantial number of consumers: The market contains a significant amount of buyers and purchasers that act independently.
Knowledge is sufficient: the purchasers have enough understanding of the product to be purchased and a variety of alternatives from which to choose. For example, we have numerous petrol stations in the city. Now it’s up to the buyer and how quickly they can get gas to decide where the petrol pump is located. Accessibility will be a important consideration here. As a result, when you feel at ease with one location and acquire gasoline in your car easily, you’ll go there instead of another location that requires more effort or time out of your vehicle.
Monopolistic Market: The monopolistic market provides distinct goods, although the distinctions are minor, as in toothpaste. Free Entry and Escape: In monopolistic competition, entry and departure are simple, with buyers and sellers able to enter and exit the market at their leisure.
Nature of the Demand Curve
The monopolistic competition demand curve has the following features: less than perfectly elastic: In monopolistic competition, no single firm dominates the market, and because to product differentiation, each firm’s product appears to be a close substitute but not a perfect substitute for those of competitors. As a result, this firm has high sensitivity in its demand.
In monopolistic competition, the demand curve facing the firm slopes downward due to the various tastes and preferences of consumers linked to the products of different sellers. This implies that the demand curve is not perfectly elastic.