Advertising and Product Differentiation

Sometimes it is possible for companies to create barriers to entry for potent rivals by using advertising and product differentiation. Advertising can create product awareness and loyalty to well-known brands. For example, Pepsi and Coca-Cola spend hundreds of millions of dollars per year advertising their brands, which makes it expensive for any potential riyals to enter the cola market. in addition, product differentiation can impose a barrier LO entry and increase the market power of producers.

In many industries such as breakfast cereals, to mobiles,household appliances, and cigarettes- It IS common for a small number of manufacturers to produce a “1 St array of different brands, models, and products, In part, the variety appeals to the widest range of consumers. But the enormous number of differentiated .products also serves to discourage potential competitors. The demands for each of the individual  differentiated products be so small that they will not be able to support a large number of firms at the bottom of motlier U-shaped cost curves, The result is that perfect competition’s DD curve in Figure,9-2(a) contracts so far to the left that it becomes like the demand curves of oligopoly or monopoly shown in Figure 9-2(b) and (c). Hence, differentiation. like tariffs. produces greater concentration and more imperfect competition.

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