ECON 305 Lecture Notes - Lecture 11: Root Mean Square, Oligopoly, Market Power
11 Dec 2014
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Document Summary
Advertising causes the differentiation of a product, which in turn causes the demand curve to become higher and less elastic. Persuasive: designed to shift consumers" tastes or change the perception of a brand. Advertising about pricing can increase competition and have positive welfare effects. Indeed, advertising price decreases price in the market as more customers are attracted. Without advertising, no store may find it profitable to charge the low price but with advertising they all do. The drop in price might cause some quality problems though. Advertising can be welfare enhancing by resolving the lemon"s problem and give you the location of a search good. Advertising can reinforce dominance by a few firms. A potential entrant might have to advertise extensively to overcome the goodwill created by incumbent"s persuasive advertising, which incumbent did not have to incur. This can deter entry, increase incumbent"s market power and price. The importance of the bte depends how long-lasting advertising effects are.
