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Learn the toughest concepts covered in Microeconomics with step-by-step video tutorials and practice problems by world-class tutors

Monopolistic Competition



The Role of Advertising

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Alright. So now let's consider the effects of advertising in monopolistic competition. So, we're gonna see is that firms advertise to differentiate their product, right? When you see commercials for a Big Mac or for a BK whopper right there trying to let you know how their burger is better or different from everyone else's burger and why you should buy theirs instead of other people's burgers. Right? So, it's also going to create demand for your burger, right? For your product, whatever it might be, it's gonna be created through this advertising as well. It's gonna influence the customers to want to try or buy your product. All right. So some of the positive effects of advertising here, right, What are we trying to do? We're trying to convey the price is right. We're trying to tell the customers how much our product cost. We're also gonna inform customers about new products, right? When we have a new product, we want to let them know that we've created this. So we put out an advertisement to let them know and we can even just let customers know where to find us. Right? Where are we located? Come find us, Come buy our products. However, there's the other side of the coin, right? There's critics about advertising. Let's say this isn't really what advertisers are doing, right? When you think about the common commercial that you see on tv, they're probably not just telling you, hey, this is the price of a can of coca cola, right? They're not really talking about that. They're taking a more psychological approach rather than informational, They're trying to to affect you psychologically here. Right? So, think about these commercials for corona beer, right? Whenever you see a commercial for corona, it shows p people on the beach relaxing. It's such a perfect day. And they're sipping their ice cold corona. Right? So they're not telling you anything about the product, right? You barely even know that it's a beer in the commercial. They're just letting you know that if you have a corona you're gonna be in paradise, right? And I live here in Miami and I actually see this all the time. You go to the beach and everyone's there drinking Coronas. So maybe that does have that psychological effect on people, right? You see commercials for like coca cola and it's everybody hanging out with their friends drinking a coca cola. It's kind of giving you this idea that you're gonna be sad, right? You're gonna be sad if you don't buy our product, sad without the product, right? Something like that. So, they're not really going with an informational approach. More psychological. Alright, so the next thought here, when we talk about advertising is the use of brand names. So when you see a brand name for a product, like when you see coca cola, right? Rather than some generic cola? Or if you, you know about the Big Mac, right? When you think of the Big Mac, these brand names differentiate the product, right? They give this Big Mac a difference from other hamburgers, right? The Big Mac is something specific, that's not just a regular hamburger anymore. So what they do um they differentiate the product like that, right? They have this name for the product. It makes them different from a regular hamburger because they're a Big Mac, right? But it also ensures for the customer the quality of the product. Right? So when you see a brand name, there's an expectation of the quality, right? When you go to the store and you buy a coca cola, you're gonna expect a search quality because of that brand name, right? You're gonna know what you should expect out of the product. So that's kind of a good thing for the customers, right? It helps them ensure this quality and it makes the firms have an incentive to maintain the quality, right? Because they have this reputation to maintain for their brand and there's customers that are loyal to the brand name um that that are that want this consistent quality. Right? So just like that, we're gonna see that advertising when you put an ad on tv, it's also acting as a signal. So it signals to the customer that this product is a quality product as well. Okay, So there's a signal um to the customer when they see an advertisement just because the advertisement exists. All right? So the idea here is that the consumer might think rationally when they see the ad on tv, right? There's some new product on tv, some new sandwich shop that opened up and they're they're advertising on tv. The customer's gonna think, well, if they're gonna spend all this money on advertising, right? The product must be good. That's kind of a rational thought. Right? They're spending all this money. I might as well try the product, Right. That's what that's what's gonna happen here. The ad advertising causes the customers to at least try the product, Right? And if it's good, they're gonna keep buying it, right? They're gonna be hooked, then they're gonna stay buying it. But if they don't like it, right, they're not gonna buy it again. So, at least that advertising brings them in to try the product. Right? So, it signals to the customer that there's some sort of quality because they're willing to spend all this money advertising. Alright, So let's go ahead and do this practice problem in the next video, it's just kind of a high level thought about advertising. You can see we didn't really go into too much detail here, but it's just a topic to consider when we're discussing monopolistic competition. Alright, let's go ahead and do that in the next video

If advertising makes consumers more loyal to particular brands, it could ________ the elasticity of demand and __________ the markup of price over marginal cost.