Monopolistic competition is when there are many firms in the market that sell similar but not identical products. Some attributes of monopolistic competition are: many sellers, product differentiation, and free entry and exit into and out of the market.
An oligopoly is a market structure where there are few firms selling similar or identical products. Both firms are a form of imperfect competition.
Advertising can be vital to both monopolistic competition and oligopoly firms. These firms often use advertising to develop brand names and create consumer loyalty. In our text it states that there is a bit of a fiery disagreement between economists over the role advertising plays and the intentions behind these firms when they utilize it.
The critics state that firms use advertising to influence customers' preferences and inhibit competition. The defenders say that advertising is used to inform customers and compete on price and product quality.
I have to say I think I'm stuck in the middle. While I do see some firms using advertising for informational purposes, I also do think it is to thwart compeition by creating such a saturation for a product in a consumer's mind that it is the only one they think of and perceive it to be superior. There really is no informational reason for firms to pay for product placement in movies and on TV shows, and some label it as subliminal messaging. How many subtle messages have you seen-maybe without even realizing it?
ET loves Reeses Pieces.
Little Nicky thinks Popeye's Chicken is [expletive] awesome!
Rene Russo shotguns a Pepsi like there's no tomorrow.
When you come back from the future, Western Union may have a package for you.
And I am beginning to think I could jot on down to the local GM dealer and buy a car that transforms into a cool robot.
Got a zit? Put some Windex on it.
I don't know that any of these advertisements are informational (maybe the one for Popeye's Chicken, haha) but they sure are ingeniously building brand loyalty.
When advertising is successful, firms will attract consumers. The consumer may turn into a loyal customer, and keep returning to buy the firm's products. Therefore I would think that successful use of advertising can definitely give a firm an edge, and maybe even allow the firm to act as a monopoly in the short-run.
The most interesting thing to me in this chapter was the relation of the supply and demand curves of monopolistic competition. I thought it was interesting how in the short-run, a monopolistically competitive firm will choose its quantity and price the same way a monopoly does - by producing at a point where MR=MC. That being said, when a company is doing well, it is an incentive for others to enter the market. When another firm enters the market it would decrease demand for present firms, shiftint the curve to the left. In the long-run this could cause a firm's equilibrium to be at a point where P=ATC, and they would not have any profit.
Ciao!
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