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Why is there so much advertising in oligopoly? How does such advertising help consumers...

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gllin | Student, Undergraduate | eNotes Newbie

Posted March 20, 2009 at 4:12 AM via web

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Why is there so much advertising in oligopoly? How does such advertising help consumers and promote efficiency? Why might it be expensive at times?

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted May 29, 2009 at 1:35 PM (Answer #1)

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Oligopoly refers to the type of competition in a market where a few dominant manufacturers dominate the market. Each of these dominant player has some influence on the market price of the product as well as the total market demand. However such influence is limited because action of any one supplier can result in counter action by competitors.

We can contrast from two other types of markets - perfect competition and monopoly. In perfect competition there are a large number suppliers, none of them dominant enough to have influence on market prices or total market demand. In monopoly there is only one dominant supplier who has substantial power of influencing both the market price and quantity. Usually monopolist tries to fix prices at such level that the combined effect of  total sales revenue and total cost of sales results in maximum profit.

Advertising in perfect competition does not enable a company to either increase their price or to get a larger share of total market. In monopolies advertising may be used to generate greater awareness of the product and its value to the customer. This can result in increasing overall market demand. However the monopolistic supplier has no need to use advertising to increase market share.

In contrast, oligopolistic firms can gain maximum from advertisement by increasing its market share as well as increasing total market demand. To achieve this, they need to establish the superiority of their products over those of their competitors, and in doing so they must also counter the impact of advertisement of the competitors. Because of these reasons the level of adverting tend to be higher in oligopolistic markets.

Advertising may or may not result in improved consumer benefits and efficiency When advertising results in increased sales and in turn increased production, it may lead to economy of scale. But advertising itself involves some cost. Advertising improves efficiency only when savings from economy of scale exceeds the cost of advertising.

Advertising has no direct relationship with benefits to customers.If increased sales turnover, because of advertising or any other reason, is accompanied by reduced prices, customers will benefit.

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