Monopolistic Competition and Advertising

Today, many companies focus on the quality or individual attributes of their products versus the quality or individual attributes of a competitor’s products in order to gain a competitive advantage in the market. The economic theory of monopolistic competition, and in particular it’s focus on product differentiation, is used as the basis for which the advertising strategies of many organizations are built. The use of persuasive advertising and comparison advertising strategies in commercials, print ads, and other forms of media focus on ways in which companies can increase their share of the market by taking on competitor products or services. However, some companies have gone too far in their strategies or claims prompting the competition to fight back in court.

The theory of monopolistic competition was presented by Edward Hastings Chamberlin in 1927 as his economics dissertation at Harvard which was later published as a book The Theory of Monopolistic Competition in 1933 (Hunt, 2011). Chamberlin distinguished three types of competition based on price, sales effort, and quality or product competition (Copeland, 1940). Monopolistic competition exhibits elements of both a perfectly competitive market and a monopoly. In a perfectly competitive market there are many buyers and sellers of an identical product, but individual sellers are not able to influence the overall product price in the market (Robinson, 1934). The aspects of a monopoly present in monopolistic competition are related to the fact that the products sold in the market are slightly different from those products which are sold by other sellers. Therefore, monopolistic competition “refers to the case where there are many sellers of a differentiated product and entry unto or exit from the industry is rather easy in the long run” (Salvatore, 2012, p. 373).

Chamberlin’s theory of monopolistic competition is considered as one of the tenants on which marketing theory is built. In fact,...