Advertising by existing firms in an oligopolistic industry

Question

Quizplus · Accepted Answer

Advertising can be an effective entry barrier as it increases brand loyalty and recognition, making it harder for new entrants to gain market share. It also allows firms to differentiate their products and charge a premium price, leading to higher profits. However, it may not maximize joint profits as firms may engage in a "game of advertising" where they spend excessively on advertising to gain a competitive advantage, leading to lower profits for all firms in the industry. Advertising does not necessarily allow easy entry for a new entrant with small sales as they may not have the resources to compete with established firms' advertising budgets.

Advertising by Existing Firms in an Oligopolistic Industry