Mankiw's Principles of Microeconomics Chapter 16

Muse a little about the role of advertising in industries classified as monopolistic competition or even oligopoly. Can advertising make markets either more or less competitive?  How?

Now that the political ads are over with we can all resume our normal programming which includes copious amounts of advertising. While most of us usually use this time to hit the fast forward button of our DVR, or run to bathroom, it’s not often that we ponder about the purpose of advertising as a business, and its benefits or disadvantages on the marketplace. One of the first questions any business asks is does it need to advertise. As with any decision there are pros and cons to this additional expense. Opponents of advertising will argue that it offers no benefit to the consumer since the purpose of it is to manipulate the consumer’s perceptions of the product. Proponents of advertising argue that it divides market resources more equally through educating the consumer and if every business advertises, consumers will have the knowledge to know about price variances and will make an informed decision when making their purchases. In the case of monopolistic competitors or oligopolies, advertising and reinforce brand loyalty as well as sends a message to the consumer that the product that they’re paying a premium for is of higher quality than the inferior product. Also, with only a few choices given to the consumer, every bit of market share that business can pull away from their competitors’ results in increased market share.


What was the most interesting thing you learned in this chapter?  Why was it interesting to you?

I found the most interesting section of this chapter the case study on the article by Lee Benham; which was published in the Journal of Law and Economics in 1972.
In today’s dollars consumers saved $49.00 between firms that advertised and those that don’t. That’s a significant consumer surplus increase. As a result, some of that surplus would increase overall consumer product demand, which would be beneficial for the economy as a whole.