Which of the following best describes the role of advertising in monopolistic competition?

• A. Advertising eliminates product differentiation and leads to perfect competition.
• B. Advertising always reduces consumer demand for the advertised product.
• C. Advertising is only used by firms in perfectly competitive markets.
• D. Advertising differentiates products and increases market power for firms.

Answer: (D)

Verified step by step guidance

1. Understand the market structure of monopolistic competition, where many firms sell products that are similar but not identical, leading to product differentiation.
2. Recognize that advertising in monopolistic competition is primarily used to highlight differences between products, making consumers perceive them as unique.
3. Recall that advertising does not eliminate product differentiation; instead, it reinforces it by informing consumers about specific features or qualities.
4. Note that advertising can increase a firm's market power by making its product more attractive or recognizable, allowing the firm to have some control over price.
5. Conclude that the role of advertising in monopolistic competition is to differentiate products and increase market power, rather than eliminating differentiation or reducing demand.