How does advertising typically affect competition between firms in a market?

• A. It always reduces competition by creating monopolies.
• B. It eliminates consumer surplus by raising prices above willingness to pay.
• C. It prevents new firms from entering the market by lowering consumer willingness to pay.
• D. It can increase competition by making consumers more aware of alternative products.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the role of advertising in microeconomics. Advertising is a tool firms use to inform consumers about their products, differentiate their offerings, and influence consumer preferences.
2. Step 2: Analyze how advertising affects consumer awareness. By increasing awareness of alternative products, advertising can make consumers more informed about their choices, which can intensify competition among firms.
3. Step 3: Consider the impact on market competition. When consumers know more about different products, firms must compete more aggressively on price, quality, or features to attract buyers, which can increase competition rather than reduce it.
4. Step 4: Evaluate common misconceptions. Advertising does not always reduce competition or create monopolies; instead, it can sometimes raise prices but also can lead to more competitive markets by encouraging innovation and product differentiation.
5. Step 5: Conclude that advertising typically increases competition by making consumers more aware of alternative products, which aligns with the correct answer choice.