Question

1. Three market structures: perfect competition, monopoly, and monopolistic competition.
– In each of these, would you expect to see firms spending money to advertise their products?
Why or why not?

2. Is advertising good or bad from society’s viewpoint? Try to think of at least one “pro” and “con.

Answer 1

Ans 1) Perfect competition market - Firms in perfect competition form of market has no control on the prices of goods.To gain maximum profits they are forced to sell their goods at the prevailing prices in the market.They are known as price takers.

I would not expect to see firms in perfect competition market spending on advertisement as for them expenditure on advertising looks illogical because this will not increase their profits as in perfect competition market ,goods are standardised so advertising cost will only increase their marginal cost.Advertising by single firm will not benefit it individually rather it will be advantageous for all the firms in the market. It will be advantageous for firms at industry level by effecting the demand for the products and sustaining the industry with increased demand but no advantage for individual firms.

Monopoly - When there is a single or individual seller for goods in the market it is a monopoly form of market.He/she is the price maker and has to face no competition as they have no close substitute for their goods.

I would expect to see spending on advertising by the monopoly firm, by observing its management. Advertising can be benefical for monopoly firm - like perfect competition has industry level benefits and firm level benefits in monopolistic competition market. Advertising here can help to have condition of higher and inelastic demand for the goods. Advertisement of goods will increase the cost of the firm resulting in higher prices. The objective of advertisement is to increase demand so that supernormal profits of the firm are not reduced.If increased demand cannot materialise the increased cost and it will result in fall in super normal profits.So, if a monopoly firm want to spend on advertisement they should first check its working conditions and management.

Monopolistic competition - It is a form of market where there are large number of firms offering similar goods but they are not substitute goods.The products of one firm are differentiated by other firms.The firms are price makers because they sell differentiated goods.

I would like to see spending on advertisement by monopolistic firms as it will be advantageous for firms in the market.It will help to attract and convince new and existing customers by providing them information about products features , differentiated qualities etc resulting in increased sales and contributing to economic growth. It will help to increase competition level and lower the prices of products. But they should take care that their cost of advertisement doesn't cause fall in profits. Advertising will provide them benefits but they should spend carefully.