Tots-R-Us operates the only daycare center in an exclusive neighborhood just outside of Washington, DC. Tot-R-Us is making a substantial economic profit, but the owners know that new daycare centers will soon learn of this highly proftable market and attempt to enter the marker. The owner decide to begin spending immmediately a rather large sum mon advertising designed to decrease elasticity. Should they wait unitl new firms actually enter? Explain how advertising can be employed to allow Tots-R-Us to keep price above average cost with encouraging entry.
Take a shot, what do you think?
Hint: if advertising is used to discurage entry, then definately advertise before new firms actually enter. Hint2: think about the capital investment needed for a new day-care center?
To determine whether the owners of Tots-R-Us should wait until new firms enter before starting advertising, we need to understand how advertising can be employed to maintain price above average cost while discouraging entry.
Advertising can be a strategic tool to create consumer loyalty, differentiate the product or service, and decrease price elasticity of demand. In this scenario, Tots-R-Us aims to decrease elasticity, which means influencing consumers to be less responsive to price changes by making their daycare center seem more unique or desirable.
Here's how advertising can be employed to achieve this objective:
1. Building Brand Awareness: Tots-R-Us should invest in advertising campaigns that focus on building brand recognition and awareness among parents in the exclusive neighborhood. By creating a strong brand image and reputation, they can establish themselves as the leading daycare center in the area, making it more difficult for new entrants to compete.
2. Highlighting Unique Selling Points: Advertising should emphasize Tots-R-Us's unique features, such as highly qualified staff, innovative learning programs, excellent facilities, or any other advantages they possess. By showcasing these distinctive qualities, Tots-R-Us can position themselves as the preferred choice for parents, making it challenging for new entrants to replicate their offering.
3. Fostering Customer Loyalty: Tots-R-Us should focus on nurturing and maintaining strong relationships with their existing customers through advertising. This can include promoting loyalty programs, special offers, and exclusive benefits for parents who continue to choose Tots-R-Us. By creating a loyal customer base, the daycare center can reduce the likelihood of parents switching to new entrants.
4. Differentiating Pricing Strategies: Advertising can also be used strategically to highlight the value provided by Tots-R-Us at their existing prices. They could emphasize the higher quality, better-trained staff, or advanced educational programs, making it difficult for new entrants to justify charging lower prices while meeting these standards.
In summary, by employing strategic advertising techniques, Tots-R-Us can decrease elasticity, maintain higher prices, and discourage new firms from entering the market. It is advisable for Tots-R-Us to start spending on advertising immediately instead of waiting for new entrants, as this proactive approach could help solidify their position and reputation in the exclusive neighborhood, making it harder for competitors to challenge their market dominance.