Question

Compare and contrast oligopoly and monopolistic competition markets. Why do they both tend to do a lot advertising.

Answer 1

Oligopoly Market:

In the oligopoly market there are few sellers and they are Interdependence. There are the restrictions or barriers to entry and conflicts among the firm. Because there are few firms in the market so, there size is very big and control over the supply and there is price rigidity.

Monopolistic competition market:

In the oligopoly market there are large number of sellers and they are not Interdependence. There is low restriction or barriers to entry and there is no price competion among the firms. Produts are similar but differentiated product and there is some control over the price.

Why do they both tend to do a lot advertising?

In the monopolistic market demand is elastic and there is some control over the price so, there is a litlle or no more space for increasing price. Here there are number of suppliers that increase competition so, increasing advertisement increase demand for the product in the market and help in increasing revenue. Monopolistic competitors advertise because the demand may increase and become inelastic, and, on the other hand, the marginal cost and average cost are likely to rise at the same time. But advertisements incraese rvenue more than the average cost that increase the porofitibilty of the firms.

In case of oligoply, the market competion is lower because the fewer number of firms. Here fims try to influence consumers through increasing advertisement that increase demand for the product in the market. It helps in increasing market share and customer base that increase sales volume and revenue of the firms in oligopoly market. The effectiveness of advertisements is totally dependent upon the level of product differentiation that exists within the market. Price stickiness in the oligopoly market is also push to the firms for spending more on advertisements. When firms are setting similar prices and may have little incentive to change them even when there is a change in the costs of supply then the advertisement help to the firm in increasing revenue through increasing client base and demand in the market.