Question

How does advertising impact monopolistic competition?

Answer 1

Monopolistic competition refers to a market situation with large number of buyers and sellers selling closely related or differentiated products but not identical product. The products are close substitutes of each other. Product differentiation is the important feature of monopolistic competition. Each firm under monopolistic competition enjoys the monopoly over the brand of the commodity and thus the firm has the control over the price of the commodity. Under this form of competition, MR < AR and AR and MR curve slope downwards and MR curve lies below AR curve. But these curves are more elastic than curves under monopoly. Example: Firms producing different brands of soaps like Dove, lux, lifebuoy, etc.

Firms under monopolistic competition use advertising because they are selling differentiated products. Advertising increases cost of firm but it also increases demand of their product and thus profit of firm in the market. Each firm is enjoying monopoly power in its product so advertising increases their profit as compared to other. Advertising induces new customers to buy their product as compared to competitor's product.