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The role of advertising for the marketplace

In the early 1980's just as serious health effects were being noted about sugar consumption, Kellogg's changed the name of Sugar Pops to Corn Pops (the sugar content did not change) and the name of Sugar Flakes to Frosted Flakes (still sugar content remained the same); General Mills produces two cereals (Total and Wheaties) that are identical in content as two different cereals (one for the healthy and one for the athletic) with different prices to different consumers. This begs the question about the role of advertising in markets. While economists freely admit that advertising that earn millions for firms, economists often view advertising as wasteful since it does very little to inform consumers. Think about that last 5 ads you have seen (TV, radio, internet, subway) and discuss EACH what was the role of the advertising for the marketplace.

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Generally, firms in monopolistically competitive markets advertise. This is because each firm sells a product that is at least slightly differentiated from its competitors' products. Think of Coke vs. Pepsi, or Cheverolet vs. Ford. Each manufacturer has a monopoly over its own product, but there are similar products that compete for the same market share. The more differentiated a product is, the more a producer is likely to spend on advertising.

Some economists see advertising in a negative light. Mainly, they assert that advertising manipulates consumers' tastes and tries to convince consumers that the products are more differentiated than they really are. Additionally, some economists assert that advertising impedes competition by creating irrational brand loyalty and reducing consumers' awareness of price differences.

On the other hand, many economists see advertising as a positive factor. ...

Solution Summary

The role of advertising for the marketplace is assessed.