Why is there so much advertising in monopolistic competition? Explain with an example.
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In a monopolistic competition structure firms create products that are not perfect substitutes. Though there are alternatives for each product being sold the firm selling the product differentiates its products to attract new customers as well as make it difficult for those that are already using the products to shift to those of the competitors. This ensures that for a small time period the firm enjoys a monopolistic position and can price its products at a rate higher than what it could in the case of perfect competition.
Monopolistic competition does not last forever and competitors enter the market with similar products that can easily be adopted. To maintain market share, firms have to invest a lot in advertising their products and exaggerate all the features that differentiates their products that any consumer with the right information would notice are irrelevant as far as the usage of the product is concerned.
For example, a firm that manufactures mobile phones could differentiate its products and attract new customers by incorporating a new camera that has a very high resolution. This new feature can increase the sale of its products and a monopolistic competition is created. If no other company introduces camera phones with a higher resolution, the company can charge a premium rate for this feature. But any knowledgeable photographer would know that just increasing the resolution by a large extent does not help in taking better photographs. That is achieved by better optics, lenses, etc. To limit the number of consumers that understand this and who would then opt for alternatives from the firm's competitors it has to launch a large marketing campaign that focuses only on the feature unique on its phones and that makes it difficult to understand the actual utility of the feature.
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