Question

Which of the following items are sold by firms in monopolistic competition in a developed economy such as the U.S? Explain your selection.

• Potato chips
• Television
• Airplane
• Battery
• Rice

Why do Coca-Cola and PepsiCo spend huge amounts on advertising? Do they benefit? Does the consumer benefit? Explain your answer by constructing a game to illustrate the choices Coca-Cola and PepsiCo make.

Answer 1

Monopolistic competition involves many firms competing against each other.It combines both monopoly and perfect competition Fast food like popato chips are sold by firms in monopolistic competition .In monopolistic competition there are many sellers that sell differentiated products . Potato chips are of different types like  lays, popchips, pringles etc.Other industry like airplane, telivision are Oligopoly market.

Advertising is a marketing technique in which the firm tries to convince a person to buy the product.  Cocacola and Pepsi advertise their product to maintain the existing customers and also to make new customers.Cocacola and Pepsi spend huge amounts on advertising because advertising lowers cost . If both the firms do not advertise economic profit will fall and may become negative . Economic profit is more when both the firms advertise.

Both the firms earn more revenue through advertising as sales increase with advertising.

Consumers gain as they get full information of the product and can also avail the discounts deals available with the product.Cocacola and Pepsi are engaged in advertising.A firm's strategy focusses on either price choice or output choice.A firm chooses the price it will set or the output it will produce.