Question

• Discuss why firms in perfectly competitive markets do not advertise individually, but sometimes advertise collectively (such as, “Got milk?” or “Beef: It’s what’s for dinner.”)?

Answer 1

Perfect competition is a market characterised by many firms selling homogeneous products at a market price. The individual firms donot have the power to affect the price and there is no product differentiation. In this case, it does not help a ftirm to go out and advertise individually as there is no differentiation that can be highlighted to sell the product. Another important issue is the advertisement costs which would add on to the firm's cost. Hence the firm might not be able to sell its produce in the market price as the price is fixed at market level without any additional cost whereas the firm has incurred advertisement costs. This would lead to losses to such firms who advertise individually. On the otherhand, if the firms can collectively advertise then the costs will be spread across all the firms and will shift the price for the entire industry. This will not adversely affect any of the firm as the market itself will absorb the additional cost. This is why most of the perfectly competitive markets advertise collectively.