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Chapter 8.docx
Chapter_8.docx
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Chapter 8.docx-Managing in Markets We will analyze
Chapter_8.docx-Managing in Markets We will analyze
Chapter 8.docx-Managing in Markets ...
Chapter_8.docx-Managing in Markets We will analyze
Page 12
Sasfied with an exisng brand, slow to launch new products, and is not aware of emerging
industry trends or changes in consumer preferences where they miss opportunies to enhance
and protect its brand
As a manger of a firm in a monopoliscally compeve industry, it is important for you to remember
that, in the long run, addional firms will enter the market if your firm earns short run profits
with its product
Thus, while you make short run profits by introducing a new product line, in the long run other
firms will mimic your product and/or introduce new product lines, and your economic profits
will decrease to zero
Firms that operate in perfectly compeve markets generally do not find it profitable to adverse
because consumers already have perfect informaon about the large number of substutes that
exist for any given firms product
Firms that have market power, such as monopolists and monopoliscally compeve firms, will
generally find it profitable to spend a fracon of their revenues on adversing
To maximize these profits, managers should adverse up to the point where incremental revenue from
adversing equals the incremental cost
Incremental cost of adversing is simply the dollar cost of the resources needed to increase the
level of adversing; feed paid for addional adversing space and the opportunity cost of the
human resources needed to put together the adversing campaign
Incremental revenue is the extra revenue the firm gets as a result of the adversing campaign;
revenues depend on the number of addional units that will be sold as a result of adversing
campaign and how much is earned on each of these unis
Profit Maximizing Adversing-to-Sales Rao
A
R
=
E
Q,A
−
E
Q,P
Where E
Q,P
represents the own-price elascity of demand for the firms products and E
Q,A
represents the firms expenditures on adverng and R = P*Q denotes the dollar value of the
firms revenues
The more elasc the demand for a firms product, the lower the opmal adversing-to-sales rao
The greater the adversing elascity, the greater the opmal adversing-to-sales rao
Firms that have market power face a demand that is not perfectly elasc; these firms will generally find
it opmal to engage in some degree of adversing
The more sensive demand is to adversing, the greater the adversing elascity, the greater the
number of addional units sold because of a given increase in adversing expenditures, and
thus the greater the opmal adversing-to-sales rao
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