Question

The cement industry is an example of an undifferentiated oligopoly. The automobile industry is a differentiated oligopoly. Which of these two is more likely to advertise? Why?

Short answer

Explain your reason. Answer: The automobile industry, a differentiated oligopoly, is more likely to advertise compared to the cement industry, an undifferentiated oligopoly. Advertising is crucial for the automobile industry to create brand awareness, highlight product differentiation, and build consumer loyalty, as their products have unique features and designs. In contrast, the cement industry produces homogeneous products and has less incentive to invest in advertising since the focus is on price competition.

Step-by-step solution

Understanding Undifferentiated and Differentiated Oligopoly

An oligopoly is a market structure where a small number of firms dominate the market. In an undifferentiated oligopoly, firms produce homogeneous products, i.e., products that are similar and can be easily substituted. In contrast, a differentiated oligopoly is when firms produce slightly different but related products. The cement industry is an example of an undifferentiated oligopoly since cement is a homogeneous product, and consumers don't perceive significant differences among various cement brands. Automobile industry, on the other hand, is a differentiated oligopoly as different car manufacturers produce cars with varying features, designs, and brand reputations, thus giving consumers different choices based on their preferences.

Analyzing the Need for Advertising

Advertising is a common way for businesses to differentiate their products, promote their brand, and attract customers. Firms in an oligopolistic market use advertising as a strategic tool to gain a competitive advantage, inform consumers about their offerings, and potentially increase their market share. In the case of an undifferentiated oligopoly like the cement industry, the products are homogeneous, and consumers have low brand loyalty as they can easily switch to another cement brand without losing any significant value. Therefore, there is less incentive for firms to invest in advertising since their products are indistinguishable, and price competition is the focus. On the other hand, differentiated oligopolies like the automobile industry produce products with different attributes, which give consumers various choices. Consumers associate certain features, quality, and style with certain brands. Therefore, advertising plays a crucial role in building brand awareness, highlighting product differentiation, and generating consumer preference.

Identifying the Industry More Likely to Advertise and Providing Reasons

Based on our analysis in the previous steps, we can conclude that the automobile industry (a differentiated oligopoly) is more likely to advertise as compared to the cement industry (an undifferentiated oligopoly). The reasons for this conclusion are: 1. The automobile industry produces differentiated products with unique features and designs, which give consumers different choices based on their preferences. Advertising helps automobile companies to highlight these differences and create brand awareness. 2. Advertising can help build brand loyalty in the automobile industry as consumers tend to associate certain features, quality, and style with specific brands. Building strong brand loyalty can lead to higher market share and long-term profitability. 3. Due to product differentiation in the automobile industry, non-price competition, such as advertising, is used by firms to gain a competitive advantage. In contrast, the cement industry, an undifferentiated oligopoly where products are homogeneous, has less incentive to invest in advertising as price competition is the critical focus. In conclusion, the automobile industry, being a differentiated oligopoly, is more likely to engage in advertising to create brand awareness, highlight product differentiation, and build consumer loyalty.