Which of the following is NOT true of competitive advertising in perfectly competitive markets?

• A. It does not affect the market price because firms are price takers.
• B. Individual firms have little incentive to advertise since their output is a small part of total market supply.
• C. It is generally unnecessary because products are homogeneous.
• D. It can increase a firm's market share by differentiating its product.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the characteristics of a perfectly competitive market, where many firms sell homogeneous (identical) products, and each firm is a price taker, meaning it cannot influence the market price.
2. Step 2: Recognize that because products are homogeneous, advertising to differentiate a product is generally ineffective or unnecessary, as consumers see no difference between products from different firms.
3. Step 3: Note that individual firms have little incentive to advertise because their output is a very small fraction of the total market supply, so advertising costs would not significantly increase their sales or profits.
4. Step 4: Recall that advertising in perfectly competitive markets does not affect the market price since firms accept the market price as given and cannot influence it through advertising.
5. Step 5: Conclude that the statement 'It can increase a firm's market share by differentiating its product' is NOT true in perfectly competitive markets, because product differentiation is not possible with homogeneous goods.