BE/U5 Topic 5 Selling Costs under Perfect Competition
There is no need for a firm working under perfect competition to undertake advertisement expenditure or to incur other types of selling costs, since by assumption, the product produced by all firms in the perfectly competitive industry is homogeneous, and an individual firm can sell as much quantity of the product as it likes at the given price.
If a perfectly competitive firm advertises for the product, the consumers who are influenced by it may purchase the product from other firms in the industry, since all are selling homogeneous products. Of course, the whole perfectly competitive industry, that is, all firms together or their association may advertise to promote the sales of their product at the expense of the products of other industries.
Such advertising is known as promotional advertising, as compared to competitive advertising with which we are here concerned. In India, there has been advertising by Terene industry producing terylene fabrics for increasing the demand for its product at the cost of other kinds of fabrics. We, therefore, conclude that under perfect competition, there can be promotional advertising by the whole industry but not competitive advertising by individual firms to snatch away the customers from each other.
Under monopoly also, there is no competitive advertising since, by definition, a monopolist produces a product which has no close substitutes. The monopolist only needs to inform or remind the buyers that his product exists and he need not emphasise the competitive nature of its product.
Of course, the monopolist may advertise to promote his sales or demand but it will not be at the expense of its rivals, since no rivals producing close substitutes are there under monopoly. Hence the advertisement by the monopolist is informative and promotional and not competitive.
It is under conditions of imperfect competition, that is, monopolistic competition and oligopoly with product differentiation that advertisement and other selling costs become important as a competitive weapon at the disposal of one firm to increase its sales at the expense of others.
This is because differentiated products produced by different firms under monopolistic competition and differentiated oligopoly are close substitutes of each other. Therefore, each firm under monopolistic competition tries to convince the buyers that its product is better than those of others in the industry.
A firm under monopolistic competition and differentiated oligopoly may keep its price and product design constant and seek to increase the demand for its product by increasing the amount of advertisement expenditure and through it persuading the buyers that its brand of the product is of superior quality than others.
Thus, this is competitive advertising which is aimed at attracting the customers to their product and weaning them away from the closely related products of the rivals. Thus, “the fundamental aim of all ‘competitive’ advertising is to attract the customers’ attention and to imprint the name of a particular product on his mind; the aim is to persuade the consumer to put his hand in his pocket and buy the product in question…………………… the main aim is to increase the sales of one firm at the expense of others and not to increase the sales of the ‘group’ as a whole.”
For instance, we all know that all tooth pastes are based upon the same chemical formula recommended by the medical science. But the firm producing Colgate through its radio and television commercial programmes has been propagating that the tooth paste of ‘Colgate’ variety is very much better than others and has special and superior qualities which are absent in other brands of toothpaste.
The fundamental aim of Colgate advertisement is not to increase the aggregate demand for toothpaste in the country but to increase the demand for ‘Colgate toothpaste’ by competing away the buyers from other brands of toothpaste. Similarly, the manufactures of other brands of toothpaste such as Binaca, Pepsodent, Oral-B, Signal, Forhans etc. are also incurring expenditure on advertisement through various means and trying to convince the buyers that their particular brand of tooth paste is better than others.
Such competitive advertisement by a firm often proves to be successful in its objective of increasing the demand for a particular brand of the product. Thus, as a result of advertisement, demand curve facing an individual firm shifts to the right which indicates that at a given price, a greater quantity of the product can be sold.
It follows from above that in the presence of selling costs or advertisement, demand curve for a product cannot be taken as an objective fact given by the tastes or wants of the consumers. A firm can alter or shift the demand curve for its product through its own efforts by incurring advertisement expenditure and other forms of selling costs.