Advertising: The Method of Most Differentiation

A little reflection will reveal that competitive advertising is largely unnecessary under either pure competition or pure monopoly (a single seller with no substitutes). The purely competitive seller is assumed to produce a homogeneous product and to be able to sell all the firm's output at the given market price. There would be no need to advertise, and if it did so, the firm, by increasing its costs, would go out of business. Indeed, under most formulations, wants are given, and perfect knowledge is assumed to prevail. By definition, a pure monopolist, facing no competitors and no substitutes, would not need to advertise and would reduce profits by doing so.

Chamberlin recognized, however, that advertising is the modus operandi of monopolistic competition, and he lumped a number of items into what he called "selling costs." In his words, "Advertising of all varieties, salesmen's salaries and the expense of sales departments, margins granted to dealers (retail and wholesale) in order to increase their effort in favor of particular goods, window displays, demonstrations of new goods, etc., are all costs of this type" (The Theory of Monopolistic Competition, p. 117). The purpose of all these costs is clear, however: to alter the position and/or elasticity of the demand function facing the individual firm.

The individual entrepreneur's reasons for advertising are obvious: "to shift to the right the demand curve for the advertised product by spreading knowledge of its existence, by describing it, and by suggesting utilities it will provide the purchaser" (The Theory of Monopolistic Competition, p. 119). In addition, Chamberlin claimed that advertising affects demands by manipulating wants. Some ads are simply not informative at all, in other words, but are competitive in attempting to rearrange wants.' Such advertising is well known to any television viewer who regularly groans at uninformative and often tasteless exhortations. The intent of such advertising is to shift the demand curve of the advertised good to the right, at the expense of goods that substitute in the product group. Such advertising allocates demand among competing sellers, but unless the consumer's saving is reduced, it does not increase aggregate demand. Advertising, in sum, plays a crucial role in establishing and maintaining product differentiation in the monopolistically competitive firm.