Tots-R-Us operates the only day-care center in an exclusive neighborhood just outside of Washington, D.C. Tots-R-Us is making substantial economic profit, but the owners know the new day-care centers will soon learn of this highly profitable market and attempt to enter the market. The owners deide to begin spending immediately a rather large sum on advertising designed to decrease elasticity. Should they wait until new firms actually enter? Explain how advertising can be employed t allow Tots-R-Us to keep price above average cost without encouraging entry.

To understand whether the owners of Tots-R-Us should wait until new firms enter or start spending immediately on advertising, we need to consider the purpose of advertising and its effects on market conditions.

Advertising serves multiple purposes, such as promoting a product or service, creating brand awareness, and influencing consumer behavior. In this case, the owners of Tots-R-Us are using advertising to decrease elasticity. Elasticity refers to how sensitive consumers are to changes in price. Decreasing elasticity means making the demand for their day-care services less responsive to price changes.

If Tots-R-Us waits until new firms enter the market before employing advertising, they run the risk of losing their competitive advantage. Once new day-care centers enter and discover how profitable the market is, they may also start advertising and attempt to attract customers by offering lower prices or better services. This increased competition may drive down Tots-R-Us's prices and erode their economic profit.

By starting advertising immediately, Tots-R-Us can take proactive measures to decrease elasticity and secure their position in the market. Here's how advertising can be employed to allow Tots-R-Us to keep prices above average cost without encouraging entry:

1. Differentiation: Tots-R-Us can use advertising to highlight their unique features, high-quality services, and reputation. By establishing themselves as the premier day-care center in the exclusive neighborhood, they can create a perception of differentiation among customers. This can reduce the likelihood of new entrants directly competing solely on price.

2. Build brand loyalty: Advertising can be used to create a strong brand presence and build a loyal customer base. By consistently delivering excellent service and maintaining a positive image, Tots-R-Us can establish a solid customer loyalty that makes it difficult for new entrants to attract customers easily. Brand loyalty reduces the chances of customers switching to new competitors even if they offer lower prices.

3. High switching costs: Advertising can emphasize the additional benefits or services provided by Tots-R-Us that are not easily replicable by new entrants. By creating perceived switching costs, such as exclusive programs, experienced staff, or specific learning methodologies, Tots-R-Us can discourage customers from switching to potential competitors, even if they offer lower prices.

4. Expanding the market: Through advertising, Tots-R-Us can aim to expand and reach a broader customer base beyond their current exclusive neighborhood. By attracting more customers, they can create economies of scale and lower their average costs. This allows them to maintain higher prices while remaining competitive and deterring potential entrants.

In summary, starting advertising immediately can help Tots-R-Us proactively decrease elasticity, establish brand loyalty, create differentiation, and expand their customer base. These strategies can allow them to keep their prices above average cost without encouraging new entry into the market, helping to protect their substantial economic profit.