“Coke is the real thing,” “Only Rolaids spells relief,” and “Tropicana
Orange Juice tastes like fresh squeezed, not concentrate.” From the
firm’s point of view, the ideal result of such advertising is to create a
large segment of loyal consumers—customers who will not defect to a
rival product, even if the competitor offers a lower price or enhanced
features.
In economic terms, increased product differentiation lessens the
substitutability of other goods while reducing the cross-price
elasticity of demand. In other words, it tends to blunt competition
between oligopolists on such dimensions as price and performance.
(For instance, because of heavy advertising, Dole pineapples and
Chiquita bananas enjoy much higher price markups than generic
fruit.) The individual oligopolistic firm finds it advantageous to
differentiate its product. Moreover, the firms’ simultaneous
advertising expenditures may well result in increased profits for the
oligopoly as a whole.^11
2.Informational Advertising.A second major role of advertising is to
provide consumers better information about competing goods.
Claims that “We offer the lowest price” (or “best financing” or “50
percent longer battery life” or “better service” or “more convenient
locations”) clearly fall into this category. Advertising copy frequently
provides direct descriptions of products, including photographs.
The effect of purely informational advertising is to make
consumers more aware of and sensitive to salient differences among
competing products. When imperfect informationis the norm, some
firms might charge higher-than-average prices or deliver lower-than-
average quality and still maintain modest market shares.
Informational advertising tends to eliminate those possibilities and
forces firms to compete more vigorously for informedconsumers. The
result is lower prices (and/or improved product quality) and lower
industry profits.^12Across the spectrum of oligopoly, both reasons for advertising—to differ-
entiate products and to provide information—are important. Both effects pro-
vide firms an economic incentive to advertise. (Indeed, only under perfect380 Chapter 9 Oligopoly(^11) To construct the most extreme case, suppose that a small amount of advertising has the power
to create a mini-monopoly for each differentiated product. Then the profits from higher monop-
oly prices would far outweigh the cost of the advertising.
(^12) To cite another extreme case, suppose that informational advertising’s sole effect is to shuffle
sales from one oligopolist to another; no amount of advertising can increase total industry sales.
Furthermore, each oligopolist has some product feature for which it pays to advertise. The result
is a classic prisoner’s dilemma. Advertising is in each oligopolist’s self-interest. But, collectively,
advertising is self-defeating. Total sales do not increase and market shares remain unchanged.
Thus, from the industry’s point of view, the total sum spent on advertising is wasted.
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