Question

a) Describe three explanations of how advertising can benefit consumers.

b) How does advertising act as a barrier to entry?

Answer 1

a) Advertising can benefit consumer

Advertising helps in increasing the loyalty of existing customers, replacing lost customers and encouraging existing customers to buy more of a company's products or services. Advertising helps to make consumers aware of a product and aims to build preference for that product over its competitors.

1.Learn about product:- People come to know about different kinds of products by means of advertising. Thus, the customer has a large variety of goods to choose from. He picks up the best from among them.Consumers grow aware of brands that cater to their needs better, learning of them from the ads companies lay. They are able to find substitutes for the products they use easily. For example, there is a costly product made by a premium brand and there is another company that offers a cheaper substitute for the same product. Higher awareness helps the customer decide which one suits his/her needs.

2.Increased access to new products and services: Netflix was very popular in the US but internationally, without advertising and promotions, very few would have known it. Consumers have access to a large range of new products and services many of which fulfill their needs better than the ones they have been using. So, advertising also works to grow our comfort zones. For example, you have two software that you are using together to achieve better results. Both have outstanding features but it is mainly the distinguishing or differentiating features of each that really makes the difference and together the two help you shine at your job.

3.Reduces the cost per unit:- Advertising stimulates production andreduces the cost per unit. This reduction in the cost is generally passed on to the consumer and that is why price of well-advertised goods are found to be generally lower than other goods of the same quality which are not so well advertised.

(B) A dvertising act as a barrier to entry

Developing consumer loyalty through establishing a strong brand image can deter entry. With a very strong brand image, a new firm would have to spend a lot of money on advertising, which is a sunk cost and a deterrent to entry. Some brands may be so strong, that no amount of advertising may be able to dislodge the incumbent firm. For example, many firms have tried to enter the cola market, but none have been able to dislodge Coca-Cola and to a lesser extent Pepsi. It is often suggested that heavy advertising by the established companies constitutes one of those barriers to entry.”

“It is often suggested that heavy advertising by the established companies constitutes one of those barriers to entry.”