If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would expect firms to be able to charge a larger markup over marginal cost.

Question

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Advertising can make demand less elastic by creating brand loyalty or the perception that there are no close substitutes for a brand. When demand is less elastic, firms have more power to set prices above marginal cost without losing many sales, allowing for a larger markup.

If Advertising Decreases the Elasticity of Demand for Specific Brand