how does advertising in a monopolistic competition market affect price elasticity and consumers perceptions as well as behaviors

Moreover, just like the monopoly, monopolistic competition firms are also the price makers In addition, Monopolistic competition is hard to earn profit in the long run due to its highly

GROUP ASSIGNMENT ECO111_IB1702_SU2022

<How does advertising in a monopolistic competition market affect price elasticity and consumers' perceptions as well as behaviors?=

Lecturer:

Lecturer: Pho Thi My Hanh Course:

Course: Microeconomics Group’s Member:Group’s Member:

1 Nguyen Van Loi SS170780 –2 Nguyen Le Phuong Ngan SS170941 –3 Nguyen Thi Hoa Phuong SS170942 –4 Nguyen Thuy Thai Van SS170969 –5 Nguyen Tran Dan Thanh SS170931 –

2

1 Monopolistic Competition: 3

2 Monopolistic Competition affects the long run and short run: 3

3 Advertising and Monopolistic Competition: 4

5.1.2 Affect on the taste of consumers: 7

5.1.3 Why do people react to advertising?: 8

5.1.4 Make consumers worry about what they don't know: 8

5.1.5 Intentionally attract attention: 9

5.1.6 Price less to spend more: 9

5.1.7 The bigger size is twice as much but only one-third more money: 9

5.1.8 Does the reaction guide the demand up or down?: 9

5.1.9 How long will firms keep on advertising?: 9

6 Real-life examples: 9

6.1 Example about charging a higher price: 10

7 The debate over advertising: 10

7.1 The critique of advertising: 10

7.1.1 Manipulate people's tastes: 10

7.1.2 Impede competition: 10

7.1.3 Harmful for society: 10

7.1.4 The paradox of choice: 10

7.2 The defense of advertising: 11

7.2.1 Provide information to customers: 11

7.2.2 Signal of Quality: 11

8 Our Opinion: 11

1 Monopolistic Competition

Monopolistic Competition is also called Imperfect competition, which is a combination of a competitive market and a monopoly market In a monopolistic competition market, the Industry has many firms offering products that are similar but not identical

2 Monopolistic Competition affects the long run and short run

Besides, monopolistic competition has some characteristics similar to bothcompetitive markets and monopoly markets For example, there are no barriers for any firm to enter or exit the market just like the competition Moreover, just like the monopoly, monopolistic competition firms are also the price makers

In addition, Monopolistic competition is hard to earn profit in the long run due to its highly elastic demand when the price changes Meanwhile, in the short run, the number of firms may adjust (enter or exit) until the economic profit drives to zero, meaning that in the short run, economic profit is possible

4 Some demonstrative examples of Monopolistic Competition are Hair cuts markets, restaurants, clothing, coffee stores, and so forth

3 Advertising and Monopolistic Competition

Regarding advertising, firms in monopolistic competition have a propensity for highly advertising, they spend large resources on advertising and developing marketing forms

To have a deeper knowledge of advertising in monopolistic, we will consider what advertising is Advertising is an enticement model, which clarifies for people or makes individuals accept, and believe that the products of one firm are different from the ones of another firm

A successful advertising campaign results in the firm's perceived demand curve is more inelastic, leading to demand increases Therefore, the goal of differentiation and advertising in monopolistic competition allows firms to sell a greater quantity, charge a higher price, or both, hence increasing their profits

Advertising will increment demand and reduce demand elasticity Thus, advertising will increase the quantities of the product the consumers are willing to pay for, leading to a shift in the demand curve to a higher level.

Firms in a monopolistic competition market will use advertising to maintain their profits

because advertising affects the firm's products by increasing their demand

Therefore, advertising in monopolistic competition is excessive, as long as revenue per product is more than an increase in average cost per product, it may not result in losses.

4 Price

4.1 How does the demand curve become more inelastic?

The downward slope of a monopolistically competitive demand curve signifies that the firms in this industry have market power Market power allows firms to increase their prices without losing all of their Customers The downward slope of the demand curve contributes to the inefficiency of the market, leading to a loss in consumer surplus, deadweight loss, and excess production capacity

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Why

Because the monopolistically competitive firm's product is differentiated from other products, the firm will face its own downward sloping "market" demand curve This demand curve will be considerably more elastic than the demand curve that a monopolist faces because the monopolistically competitive firm has less control over the price that it can charge for its output The firm's control over its price will depend on the degree to which its product is differentiated from competing firms' products If the firm's product is not differentiated from other products, the firm will face a relatively elastic demand curve and will have less control over the price it can charge If the firm's product is differentiated compared to a competing firm's products, the firm will face a relatively inelastic demand curve and will have more control over the price that it can charge

Price searching behavior The monopolistically competitive firm will be a price searcher rather than a price taker because it faces a downward-sloping demand curve for its product The firm searches for the price that it will charge in the same way that a monopolist does, this by comparing marginal revenue with the marginal cost at each possible price along the market demand curve

-> charge higher price

5 Consumer

5.1 How does advertising affect the demand curve?

5.1.1 Market Effects

Advertising can increase consumer awareness and expectations about the benefits of your product, and increase the number of people willing to buy your product for the right price Ultimately, advertising affects demand by building a desire for a product or brand in consumers' minds.

5.1.2 Affect on the taste of consumers:

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The demand curve for a product shift when consumer tastes change An

increase in the price of a product causes an increase in demand for substitute products and a decrease in demand for the product's complements Consumer expectations cause people to demand either more or less of a good.

5.1.3 Why do people react to advertising? (psychological aspects)

According to psychologists, there are mirror neurons in the human brain This cell stimulates people to act before an action they are impressed with Advertisers often apply this theory to lead consumers to follow their desires such as purchasing decisions, product experiences, service usage, etc

5.1.4 Make consumers worry about what they don't know

Advertisers can design mysterious ads with the information conveyed on the surface of the text, and very modest images to stimulate the tastes of consumers The more curious people are, the more successful the ad will be

lead the user's psychology by making them wait, not allowing them to soon relieve their curiosity

5.1.6 Price less to spend more

Do you see the products displayed on the shelves, on e-commerce platforms, etc in general, in many places, most of which have very retail prices such as 99,000 VND, 189,000 VND, or not? According to psychologists, this The "trick" of not rounding the price is popular among app advertisers and never fails Even though customers know clearly that they will have to pay 100,000 VND and not 99,000 VND, they are still willing to pay because they have been attracted by the "cheaper"

5.1.7 The bigger size is twice as much but only one-third more money

If you go to branded cafes, you will find this advertising tactic to "seduce" consumers buying a larger size is very common If you buy a small coffee cup with 30ml, you will spend 30,000 VND, but if you buy a 45ml coffee cup of the same size, you only need to spend 38,000 VND According to experts, customers feel that they only need to spend an extra 8,000 VND to get 15ml, which is much more profitable!

5.1.8 Does the reaction guide the demand up or down?

The reaction will guide the demand up because those who advertise will manipulate the needs of consumers in their favor, highly competitive advertising is not allowed such as using another company's bad image to make customers avoid using their products and advertise our company that our company is better than another

5.1.9 How long will firms keep on advertising?

Advertising in monopolistic competition is excessive, and as long as revenues per product are more in comparison to an increase in average cost per product, it may not result in losses One of the characteristics of monopolistic competition is a relatively easy entry Firms in a monopolistic competition market will use advertising to maintain their profits because advertising affects the firm's products by increasing their demand

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6 Real-life examples:

6.1 Example about charging a higher price

Apple is one of the most reputed brands in the world at the moment They have been releasing a lot of advertisements that make their products become

exclusive and turn people into loyal customers, thus the demand for the products with the bitten apple logo become much more inelastic Then they can freely set the daylight robbery price and do not worry much about their consumers The example, On August 3,

1997, he introduced a new slogan for Apple's ads, which was "Think Different" Steve Jobs was pleased with this idea and changed it slightly, instead of using anonymous characters, he wanted to invite stars and celebrities to participate in the campaign The campaign kicks off with a trailer called <Crazy Ones= directed by Jennifer Golub The one-minute clip is made from black and white footage of creative celebrities such as Albert Einstein, Bob Dylan, Martin Luther King, Jr., John Lennon, Martha Graham, Muhammad Ali, Alfred Hitchcock, Mahatma Gandhi, Jim Henson, Maria Callas, Picasso, and Jerry Seinfeld The clip ends with a little girl opening her eyes wide as if seeing possibilities unfold before her eyes

After 12 months, the success that the "Think Different" campaign brought to Apple began to become more apparent Sales skyrocketed, and stock tripled In April 1998, the company reported profits for two consecutive quarters after nearly two years of losses of $2 billion The target audience of the campaign is customers who have purchased Apple products According to Rohna Hamilton, a marketing representative of Apple, their number one priority is to make people who have bought Apple products realize they are still here and fighting for the existence of the brand A year after the launch of the campaign, Apple launched the iMac - now the best-selling computer in history

The campaign was successful with numerous awards, including an Emmy Award in 1998 for the best advertising and a Grand Effie Award in 2000 for the most effective

campaign in the US

7 The debate over advertising:

The debate over Advertising has always been a hot topic since its first day Nowadays, with the advancement of technology, the controversy tends to be more intense Just like 2 sides of the coin, when it comes to advertising, there are 2 different opinions about advertising, one critic and one defends

7.1 The critique of advertising: 7.1.1 Manipulate people's tastes

Critics of advertising state that adverts manipulate people's tastes through psychological tricks These tricks are so subtle that they make up for a fake need for the product in the customer's mind Sometimes, the customers don't need that product, they just think they need it because of the advertising That's a huge difference

7.1.2 Impede competition

Critics also say that advertising gives large firms the destructive power to eliminate smaller firms Because large firms have more money to put into advertising

7.1.3 Harmful for society

Some advertisements are toxic, some are unethical, and some are corrupt

7.1.4 The paradox of choice

The paradox was discovered by American psychologist Barry Schwartz The theory can be summarized as "The more choices you have, the harder it is to make a decision"

7.2 The defense of advertising:

On the other hand, we see a few basic benefits of impact advertising

7.2.1 Provide information to customers

Defenders say that advertising helps to deliver information about the products and services to the customers, enhancing their ability to make decisions so they can make better choices

Our opinion:

As far as I am concerned, I don't like a lot of advertisements on TV I think advertising influences my choice but I always compare the prices to get the best deal and save money

In conclusion, I must say that development of our society is impossible without advertising The benefits of advertising outweigh its drawbacks as long as we can control the rogue

12 Source;

https://kstatelibraries.pressbooks.pub/economicsoffoodandag/chapter/ unknown -5/ https://www.economicshelp.org/blog/195/economics/calculating-price-elasticity-of-demand/

competition

https://www.studypool.com/documents/3789443/1-53-theory-of-firms-monopolistic-https://en.wikipedia.org/wiki/Think_different

https://bizfluent.com/about-7414742-advertising-influence-people-.html

https://opentextbc.ca/principlesofeconomics/chapter/10-1-monopolistic- competition/

https://www.yourarticlelibrary.com/advertising/6-main-criticisms-against-advertising- explained/25869

https://www.cliffsnotes.com/study-guides/economics/demand-supply-and-

elasticity/demand