Principles of Economics- Mankiw (5th) 377

Principles of Economics- Mankiw (5th) 377 - CHAPTER 17...

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CHAPTER 17 MONOPOLISTIC COMPETITION 387 advertising, the average price was $26. Thus, advertising reduced average prices by more than 20 percent. In the market for eyeglasses, and probably in many other markets as well, advertising fosters competition and leads to lower prices for consumers. ADVERTISING AS A SIGNAL OF QUALITY Many types of advertising contain little apparent information about the product being advertised. Consider a firm introducing a new breakfast cereal. A typical ad- vertisement might have some highly paid actor eating the cereal and exclaiming how wonderful it tastes. How much information does the advertisement really provide? The answer is: more than you might think. Defenders of advertising argue that even advertising that appears to contain little hard information may in fact tell consumers something about product quality. The willingness of the firm to spend a large amount of money on advertising can itself be a signal to consumers about the quality of the product being offered. Consider the problem facing two firms—Post and Kellogg. Each company has
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