How does advertising help consumers and promote efficiency in monopolistic competition?

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pohnpei397 eNotes educator| Certified Educator

In monopolistic competition, advertising helps consumers by allowing them to know about the products being offered. This helps them to know which businesses they would like to patronize.  When this happens, there is greater efficiency because those businesses are encouraged to produce more of their goods or services.

In monopolistic competition, the products made by each firm are differentiated.  That means that they are not all the same.  Some consumers might prefer one type of good while others prefer another type. For example, one consumer might want a restaurant with a casual atmosphere while another might want one that is more formal.  Advertising helps consumers know which firms are likely to offer the products that they want. This is good for consumers because it makes it less likely that they will be disappointed when they patronize a firm.

Advertising also helps with efficiency.  It does this partly because it steers more consumers to the goods or services that they want.  It also does so by bringing more business to the “best” firms.  Those firms are then forced to produce more of their good or service. Monopolistic competition is inefficient because it does not produce as many goods and services as it ideally would.  Therefore, if advertising helps cause more goods and services to be produced, it will increase efficiency.