Question

match each type of market to possible incentive or disincentive for advertising in it

Answer 1

Introduction

Advertising as a tool, is constantly used by companies to bring in more customers to its outlets and allow for more profits to run in the company. However, many companies do not realize the kind of market type they operate in and are prone at making errors while making the decision on how much money is required to be spent on advertising and the pros and cons of it in the current market structure in which they operated.

Case Specifics:-

The different types of market structures and their possible incentives and disincentives for advertising in it are as follows:-

1) Perfect Competition:-

A perfect competition is a market structure, in which there are numerous buyers and sellers in the market for the same product. The competition is so much, that a single producer cannot alter the pricing of the goods because of the alternatives available in such a market structure to the consumers.

Advertising in such a market structure would be prone to the following incentives and disincentives respectively.

Incentives:-

The incentives for advertising in a perfect competition are that it can create brand value to consumers which is up and beyond the nature of the product. Thus, in perfectly competitive market structures also, it can be possible to earn higher profits than competition by promoting the brand and retaining the consumer respectively.

Disincentives:-

The cost of creating a brand name in a perfectly competitive environment is extremely high. Small companies cannot thus spend money on advertising their brand especially when competition is so high and increased costs can lead to losses for an enterprise. Thus, the disincentive is that small companies find themselves spending too much to create a brand value and loose the plot because of increased costs respectively.

(2) Monopolies:-

A monopoly is a market structure when there is only one single producer of the good or service which is sold to the public. As such, the quality, quantity and pricing of the product is something, which is directly in the control of that single company respectively.

Further, in a monopoly, the effects of advertising are as explained in detail:-

Incentives:-

Even in monopolies market demand may need some awareness creation so that the product sells in a better manner to the consumer. For this to create awareness in the market and to increase the overall demand to the maximum possible limits it can be encouraging for monopolies to spend money on advertising.

For example a public utility like gas pipelines which is controlled by the government constantly advertises for the need to eliminate wood as a source of energy. This increases the demand, creates awareness and helps the government in controlling ill effects of wood burning such as pollution and health related issues.

Further, maintaining a monopoly is also important. Through active advertising, monopolies can maintain themselves and eliminate the risk of small producers emerging and spoiling the markets.

Disincentives:-

In conditions where monopolies operate at full demand, the process of advertising is unwanted for and can be considered as a wasteful expenditure.

(3) Oligopolies:-

An oligopoly is a structure in which the number of producers producing a commodity is relatively low. Such market structures exists when the barriers to enter trade can be qualified by a small number of companies only. For example The Telecommunications Sector in the United States in which handful of producers such as AT&T and Verizon are the only suppliers of the services being offered.

The incentives and disincentives of advertising in this market structure is as follows:-

Incentives:-

The incentives for oligopolies to engage in advertising is that it helps them retaining customers to its own brand. Oligopolies tend to advertise like traditional competitive firms and ensure that customers can find it more value for money to stick to one brand. Thus it is used as a tool to cut demand of the competition and ensure long term profits for a firm

Disincentives:-

The biggest disincentive in advertising in oligopolies is that it can be used by all companies alike. Competition is relatively lesser and other companies soon follow suit and engage in equal expenditure on advertising which in turn increases the cost of operations respectively.

(4) Monopolistic Competition:-

A monopolistic competition is similar to perfect competition where numerous producers and buyers exist in the market type, however, the product offering Is different from competition thus giving an advantage of monopoly also in case the seller is unique in nature.

The biggest example of this is the artistic industry or the music industry, in which the number of buyers and sellers may be high, but the uniqueness which each artist has differentiates the offering and creates a unique market structure respectively.

The pros and cons of advertising in a monopolistic competition are as described:-

Incentives:-

A monopolistic competition is characterized by unique nature of the products or services being offered. These values when described to the consumers in a better manner can result in increased demand and can create brand value which may result in repurchase and loyalty among customers respectively.

Disincentives:-

If consumers perceive the uniqueness of the product being offered by your competition in this market structure as more valuable they will continue to purchase it no matter the level of advertising. This happens because of the differences in the nature of the product or service being sold respectively.

Please feel free to ask your doubts in the comments section if any.