Here’s another sign this winter is an anomaly: We got our first major snowfall just as the TV commercials for agricultural chemicals were starting up again.
In winters when major snowfalls started in October, commercials for weed and insect killers serve as a more reliable harbinger of spring than Punxsutawney Phil, the famously mercurial Pennsylvania groundhog.
While the barrage of farm chemical ads is a minor irritant to most viewers, it is a godsend to economics professors.
There are few better real-world illustrations of an important aspect of what economists call “monopolistic competition” than heavy advertising of nearly equivalent products.
All microeconomics students are taught that there are two polar opposites in the structure of productive industries.
One is “pure” or “perfect” competition. Traditional farming is perhaps the best example. There are a lot of producers, a lot of buyers and uniform products. No single farmer is big enough to be able to influence prices, and no farmer has an incentive to advertise.
Pure monopoly, where there is only one producer, is the extreme opposite. Electric Boat Division of General Dynamics is the only U.S. builder of nuclear submarines. Xcel Energy is the only source for residential natural gas service in St. Paul and Pfizer is the only maker of Viagra.
A producer who enjoys monopoly status has considerable power to set prices, if they aren’t regulated by government as utilities like Xcel are. There’s little reason for a monopolist to advertise to increase sales.
Most firms, however, fall between the two extremes. Economists, however, group them into two general categories. Oligopolies exist when there are a few producers, but not just one. And then, there’s “monopolistic competition.” The emphasis here is on “competition” rather than “monopolistic.”
Monopolistic competition involves situations where there are many producers and a high level of competition. Fast food restaurants are a classic example. Yes, a blindfolded burger gourmet may be able to tell a McDonalds burger from one made by Wendy’s, Burger King or Hardees, but the difference is small.
And yet, a burger chain can gain sales by emphasizing those small differences in advertising. Firms in monopolistic competition spend tons of money on advertising.
This is why 5 million Minnesotans are subjected to ag chemical ads. While the number of chemical manufacturers is small, resembling an oligopoly, the products themselves are good substitutes for each other.
They have different chemical formulations but most do essentially the same job. The manufacturers face a situation close to fast food joints: The variation between products is not great, but the customer does have some sense that different brands are somehow distinct.
The more you can convince farmers that your rootworm insecticide is better than that of your competitor, the more you can sell or the more pricing power you have. Farmers watch TV in winter months. Hence, chemical firms saturate the airwaves with commercials even though they know that only three or four out of every 1,000 viewers will ever consider buying their product.
This is profit-maximizing, free enterprise in action.
Another visible facet of monopolistic competition is apparent excess capacity. Selling gasoline is highly competitive, but at the retail level consumers may still see some difference between Amoco and Mobil.
Gasoline retailers invest heavily in signage, the taller and brighter the better, so that people who suddenly realize the tank is getting low will see their station before that of a competitor. And they put in a lot of pumps. People gas on the go when time in getting to work or the daycare or home is limited. Customers who don’t see an easily accessible pump at one station will drive on to another.
The outcomes of monopolistic competition often seem crazy. But it gives all those marketing majors something to do.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.