8.0pt;background:#FBFAFB’>QUESTION 20
What role can advertising play with respect to differentiated products?
A. ?allows a firm to sell any quantity it wishes
B. ?allows a firm to raise the prevailing market price
C. ?shapes perceived demand for a price taker
D. ?shapes consumers intangible preferences
The Correct Answer and Explanation is:
Correct Answer: D. shapes consumers intangible preferences
Explanation:
Advertising plays a crucial role in markets with differentiated products, which are products that are similar but not identical—such as smartphones, cars, clothing brands, or even bottled water. In such markets, firms try to distinguish their products from competitors through branding, quality, style, or perceived benefits. Since the products aren’t perfect substitutes, consumer perception becomes a major factor in influencing demand.
Advertising is especially powerful because it helps firms shape consumers’ intangible preferences—preferences that are not necessarily tied to the physical or functional attributes of the product. These include:
- Brand loyalty (e.g., choosing Apple over Samsung because of image),
- Emotional appeal (e.g., associating a soda brand with happiness),
- Lifestyle alignment (e.g., luxury watches marketed as status symbols).
By shaping these intangible aspects, advertising can make consumers prefer one product over another, even if the core functions are similar. This preference can lead to pricing power, increased customer retention, and reduced price sensitivity.
Let’s briefly examine why the other options are incorrect:
- A. allows a firm to sell any quantity it wishes – This is not true in reality; demand constraints still apply, no matter how much advertising occurs.
- B. allows a firm to raise the prevailing market price – Firms in competitive markets don’t control market prices broadly; they may raise their own price, but not the “prevailing market price.”
- C. shapes perceived demand for a price taker – Price takers (like those in perfect competition) can’t influence demand through advertising because their products are identical to competitors’.
Thus, advertising’s true power lies in influencing consumer perception, and with differentiated products, this directly affects purchasing behavior—making Option D the best choice
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