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Extensions of Imperfect Competition: Advertising and Price Discrimination

24 April, 2015 - 11:52

Learning Objectives

  • Discuss the possible effects of advertising on competition, price, and output.
  • Define price discrimination, list the conditions that make it possible, and explain the relationship between the price charged and price elasticity of demand.

The models of monopoly and of imperfectly competitive markets allow us to explain two commonly observed features of many markets: advertising and price discrimination. Firms in markets that are not perfectly competitive try to influence the positions of the demand curves they face, and hence profits, through advertising. Profits may also be enhanced by charging different customers different prices. In this section we will discuss these aspects of the behavior of firms in markets that are not perfectly competitive.