Chapter17-Monopolistic Competition.ppt

Advertising Firms that sell highly differentiated consumer goods typically spend between 10 and 20 percent of revenue on advertising. Overall, about 2 percent of total revenue, or over $100 billion a year, is spent on advertising. Advertising Critics of advertising argue that firms advertise in order to manipulate people’s tastes. They also argue that it impedes competition by implying that products are more different than they truly are. Advertising Defenders argue that advertising provides information to consumers They also argue that advertising increases competition by offering a greater variety of products and prices. The willingness of a firm to spend advertising dollars can be a signal to consumers about the quality of the product being offered. Brand Names Critics argue that brand names cause consumers to perceive differences that do not really exist. Brand Names Economists have argued that brand names may be a useful way for consumers to ensure that the goods they are buying are of high quality. providing information about quality. giving firms incentive to maintain high quality. Summary A monopolistically competitive market is characterized by three attributes: many firms, differentiated products, and free entry. The equilibrium in a monopolistically competitive market differs from perfect competition in that each firm has excess capacity and each firm charges a price above marginal cost. Summary Monopolistic competition does not have all of the desirable properties of perfect competition. There is a standard deadweight loss of monopoly caused by the markup of price over marginal cost. The number of firms can be too large or too small. Summary The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names. Critics of advertising and brand names argue that firms use them to take advantage of consumer irrationality and to reduce competition. Summary Defenders argue that firms use advertising and brand names