Advertising - Online Tutor, Practice Problems & Exam Prep

In monopolistic competition, advertising plays a crucial role in product differentiation, influencing consumer demand. Advertisements not only convey prices and inform about new products but also create psychological associations, enhancing brand perception. Brand names signal quality, encouraging customers to try products based on perceived value. This dynamic fosters competition, as firms must maintain quality to retain loyal customers. Ultimately, effective advertising can lead to increased consumer surplus and market power, shaping the overall market structure and equilibrium price.

The Role of Advertising

All right. So now let's consider the effects of advertising in monopolistic competition. Firms advertise to differentiate their product. When you see commercials for a Big Mac or for a BK Whopper, they're trying to let you know how their burger is better or different from everyone else's burger and why you should buy theirs instead of other people's burgers. It also creates demand for your burger, for your product whatever it might be, created through this advertising as well. It's going to influence customers to want to try or buy your product.

Some of the positive effects of advertising here are that we are trying to convey the prices. We're trying to tell the customers how much our product costs. We also inform customers about new products. When we have a new product, we want to let them know that we've created this, so we put out an advertisement to let them know and we can even just let customers know where to find us. Where are we located? Come find us. Come buy our products. However, there's the other side of the coin. There are critics of bad advertising that say this isn't really what advertisers are doing. When you think about the common commercial that you see on TV, they're probably not just telling you the price of a can of Coca-Cola. They are taking a more psychological approach rather than informational. They are trying to affect you psychologically. Think about these commercials for Corona beer. Whenever you see a commercial for Corona, it shows people on the beach relaxing, it's such a perfect day and they're sipping their ice-cold Corona. They're not telling you anything about the product. You barely even know that it's a beer in the commercial. They're just letting you know that if you have a Corona, you're going to be in paradise. I live here in Miami and I actually see this all the time, you go to the beach and everyone's there drinking Coronas. So maybe that does have that psychological effect on people. You see commercials for Coca-Cola and it's everybody hanging out with their friends drinking a Coca-Cola, it's kind of giving you this idea that you're going to be sad if you don't buy our product. Sad without the product, something like that. So they're not really going with an informational approach, more psychological.

The next thought here when we talk about advertising is the use of brand names. When you see a brand name for a product like when you see Coca-Cola, rather than some generic Cola or if you know about the Big Mac. When you think of the Big Mac, these brand names differentiate the product. They give this Big Mac a difference from other hamburgers. The Big Mac is something specific that's not just a regular hamburger anymore. What they do, they differentiate the product like that. They have this name for the product, it makes them different from a regular hamburger because they're a Big Mac. But it also ensures for the customer the quality of the product. So when you see a brand name, there's an expectation of the quality. When you go to the store and you buy a Coca-Cola, you're going to expect a certain quality because of that brand name. You're going to know what you should expect out of the product, so that's kind of a good thing for the customers. It helps them ensure this quality and it makes the firms have an incentive to maintain the quality. Because they have this reputation to maintain for their brand and there are customers that are loyal to the brand name that wants this consistent quality.

Just like that, we're going to see that advertising when you put an ad on TV, it's also acting as a signal, so it signals to the customer that this product is a quality product as well. There's a signal to the customer when they see an advertisement just because the advertisement exists. So the idea here is that the consumer might think when they see the ad on TV, there's some new product on TV, some new sandwich shop that opened up and they're advertising on TV, the customer is going to think well, if they're going to spend all this money on advertising, the product must be good. That's kind of a rational thought. They're spending all this money, I might as well try the product. That's what's going to happen here. The advertising causes the customers to at least try the product. And if it's good, they're going to keep buying it. They're going to be hooked and they're going to stay buying it, but if they don't like it, they're not going to buy it again. So at least that advertising brings them in to try the product. It signals to the customer that there's some sort of quality because they're willing to spend all this money advertising. Alright? So let's go ahead and do this practice problem in the next video. It's just kind of high-level thought about advertising. You can see we didn't really go into too much detail here, but it's just a topic to consider when we're discussing monopolistic competition. Alright? Let's go ahead and do that in the next video.

Here’s what students ask on this topic:

How does advertising influence consumer demand in monopolistic competition?

In monopolistic competition, advertising plays a crucial role in influencing consumer demand by differentiating products. Firms use advertisements to highlight unique features, benefits, or emotional appeals associated with their products. For example, a Big Mac commercial might emphasize its unique taste compared to other burgers. This differentiation creates a perceived value, encouraging consumers to prefer one product over another. Additionally, advertising can inform consumers about new products, prices, and locations, making it easier for them to make purchasing decisions. By creating psychological associations, such as linking a product with happiness or relaxation, advertising can further enhance consumer demand.

What are the positive effects of advertising in monopolistic competition?

Advertising in monopolistic competition has several positive effects. Firstly, it helps convey important information to consumers, such as prices, new product launches, and store locations. This information can make it easier for consumers to find and purchase products. Secondly, advertising differentiates products by highlighting unique features or benefits, which can create a perceived value and influence consumer preferences. Thirdly, brand names and advertisements signal quality, encouraging consumers to try new products. If the product meets their expectations, they are likely to become repeat customers. Overall, effective advertising can increase consumer surplus and foster competition among firms.

How do brand names and advertising signal product quality to consumers?

Brand names and advertising signal product quality to consumers by creating expectations and perceptions of reliability and consistency. When consumers see a well-known brand name like Coca-Cola, they associate it with a certain level of quality based on past experiences and the brand's reputation. Advertising reinforces this perception by showcasing the product in a positive light, often highlighting its unique features or benefits. Additionally, the mere presence of advertising can signal to consumers that the company is confident in its product, as they are willing to invest in promoting it. This can lead consumers to believe that the product is worth trying.

What role does psychological appeal play in advertising strategies?

Psychological appeal plays a significant role in advertising strategies by creating emotional connections between consumers and products. Instead of merely providing factual information, advertisements often evoke feelings of happiness, relaxation, or social belonging. For example, a Corona beer commercial might show people enjoying a perfect day at the beach, suggesting that drinking Corona will lead to a similar experience. This emotional appeal can make consumers more likely to purchase the product, as they associate it with positive feelings. By tapping into consumers' emotions, advertisers can create strong brand loyalty and influence purchasing decisions.

How does advertising affect market structure and equilibrium price in monopolistic competition?

Advertising affects market structure and equilibrium price in monopolistic competition by enhancing product differentiation and influencing consumer preferences. Effective advertising can create a perceived value for a product, allowing firms to charge higher prices compared to competitors with less effective advertising. This can lead to increased market power for firms with strong advertising strategies. Additionally, advertising can attract new customers and increase demand for a product, potentially shifting the demand curve to the right. As a result, the equilibrium price may rise, reflecting the higher perceived value and increased demand. Overall, advertising can shape the competitive landscape and pricing dynamics in monopolistic competition.