PRODUCT DIFFERENTIATION AND ADVERTISING

Merchants had advertised long before the Civil War, but as long as durable and semidurable goods were either made to order for the wealthy or turned out carelessly for the undiscriminating poor, and as long as food staples were sold out of bulk containers, the field of the advertiser was limited. In fact, the first attempts at advertising on more than a local level were directed largely toward retailers rather than consumers. Notable exceptions were patent medicine manufacturers, the first sellers in America to advertise on a national scale.101

After the Civil War, advertising on a national scale finally became a widely accepted practice. With the trusts, came truly national firms whose brand names and trademarks became impressed on the minds of consumers. Economic Insight 20.1 on page 369 discusses monopolistic competition resulting from the growth of brand names, advertising, and product differentiating. Wherever products such as tobacco, whiskey, kerosene, or shoes could be differentiated in terms of buyer thinking, the trusts used advertising to reassure householders about the quality of the goods being purveyed. As the quality of nondurables improved, particularly in the case of clothing, manufacturers of leather shoes, hosiery, underwear, and men’s suits and overcoats found that a loyal, nationwide following could be won through brand-name advertising. By 1920, advertising was a billion-dollar industry. In some fields, the increasing size of a firm was an important factor in the growth of its national advertising, but advertising itself helped many firms to attain these large sizes.

Measurements of American male sizes for Civil War uniforms marked the beginning of standardized clothing, and U. S. manufacturers of boots and shoes steadily improved the quality and fit of their product. Economies resulting from mass-production techniques drove down the cost of clothing, and mail-order solicitation helped to broaden markets.

MONOPOLISTIC COMPETITION

The growth of brand names, advertising, and product differentiation led economists to develop a new theory: monopolistic competition. In 1933, two books were published describing the new theory, Edward Chamberlin’s The Theory of Monopolistic Competition: A Re-orientation of the Theory of Value and Joan Robinson’s Economics of Imperfect Competition. The figure illustrates the famous “Chamberlinian tangency solution.” The demand curve facing the firm (dd) is downward sloping, showing that the firm has some monopoly power. Even if it raises its price, it will not lose all of its customers because it produces a differentiated product. Some customers will remain loyal, for example, to Levi Strauss’s overalls or Dewdrop Bitters even when the prices of these products are raised relative to alternatives. But these firms will not be able to earn extraordinary profits for long. New entrants to the

Price

Industry will capture some of the market, reducing demand, and force the existing firms into more advertising, raising costs. The long-run equilibrium price will be at p. Price will be equal to average cost, which includes only a normal profit.

There is, in one sense, excess capacity in a monopolistically competitive industry. If product differentiation could be eliminated, say, by prohibiting advertising and requiring firms to produce a simple, standardized product, the resulting competitive price would be lower, approximately at p* (only approximately because cost curves would be affected as well as demand). There would be fewer firms in the industry, each producing more output. Critics of the theory of monopolistic competition have pointed out, however, that variety may be of real value to consumers. Although it is easy to make fun of Dewdrop Bitters, Levi Strauss’s riveted overalls are another matter.

It became well-accepted that a firm had to advertise to maintain its share of an industry’s sales. It was also realized that as competing firms carried on extensive campaigns, the demand for a product might increase throughout the entire industry. Yet only a beginning had been made. Two changes were to loom large in the future of American advertising. One was the radio, which within a decade was to do the job of advertising far more effectively than it had ever been done before. The second was the change in the kind of consumer durables people bought. In 1869, half the output of consumer durables consisted of furniture and house furnishings; 30 years later, the same categories still accounted for somewhat more than half of the total. But after 1910, as first the automobile and then electrical appliances revolutionized American life, the share of furniture and household furnishings in the output of consumer durables declined rapidly. Household furnishings could not be differentiated in people’s minds with any remarkable degree of success, although efforts were continually made to do so. On the other hand, automobiles and household appliances could be readily differentiated, presenting a wonderful challenge to the American advertising account executive.