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 that new day-care centers will soon learn of this highly profitable market and attempt to enter the market. The owners decide 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 to allow Tots-R-Us to keep price above average cost without encouraging entry.
No, the owners of Tots-R-Us shouldn't wait for new firms to enter the market before implementing their advertising strategy. They should begin spending immediately on advertising to decrease elasticity and protect their market position.
Advertising can be employed as a strategic tool to maintain high prices and deter new entrants in the following ways:
1. Creating brand loyalty: Tots-R-Us can invest in advertising campaigns that focus on building a strong brand image and customer loyalty. By associating their daycare center with quality, reliability, and a positive reputation, they can retain existing customers and attract new ones. This brand loyalty makes it less likely for customers to switch to new entrants, even if they offer lower prices.
2. Differentiating the service: Tots-R-Us can promote unique features or services that set them apart from potential competitors. By highlighting factors like experienced staff, a safe environment, educational programs, or other distinctive aspects, they can justify charging higher prices and make it difficult for new entrants to replicate their offerings.
3. Emphasizing trust and credibility: Advertising can be used to establish Tots-R-Us as a trustworthy and credible daycare center. They can showcase certifications, accreditations, positive customer testimonials, or awards they have received. This demonstrates their commitment to high-quality care, making it challenging for new entrants to gain immediate trust and credibility.
4. Expanding customer base: Through targeted advertising, Tots-R-Us can actively attract new customers from neighboring areas or demographics who may not be aware of their services. By continually expanding their customer base, they can maintain a steady flow of demand and reduce the opportunities for new entrants to capture a significant market share.
By implementing these advertising strategies, Tots-R-Us can strengthen its competitive advantage, establish barriers to entry, and potentially deter new firms from entering the market. This will enable them to maintain higher prices relative to their average cost, ensuring continued economic profit in the long run.
Advertising can be employed strategically by Tots-R-Us in order to maintain their price above average cost without encouraging entry by new firms. Here's an explanation of how advertising can help achieve this objective:
1. Creating brand awareness: Tots-R-Us can invest in advertising campaigns that focus on building strong brand recognition and awareness among the target customers. By establishing themselves as the go-to day-care center in the exclusive neighborhood, they can differentiate themselves from potential competitors.
2. Highlighting unique features or services: The advertising campaigns can emphasize the unique features or services offered by Tots-R-Us that make them stand out in the market. This could include features such as highly trained staff, state-of-the-art facilities, specialized educational programs, or additional services like transportation or extended hours. By showcasing their unique offerings, they can create a perception among customers that switching to a new daycare center would mean missing out on these exclusive benefits.
3. Fostering loyalty and trust: Tots-R-Us can use advertising to develop strong relationships with their existing customers, fostering loyalty and trust. By consistently delivering high-quality care and promoting positive testimonials, they can establish a reputation that is difficult for new entrants to compete against. This can help reinforce customers' perception of Tots-R-Us as the preferred and trusted daycare provider, making it less likely for them to switch to new competitors.
4. Creating barriers to entry: By investing in advertising early on, Tots-R-Us can create a barrier for potential new entrants to overcome. Building brand recognition and customer loyalty takes time and resources. By actively and consistently marketing themselves, Tots-R-Us can make it more challenging for new players to capture a significant share of the market or attract a large customer base right away.
By starting advertising efforts early, Tots-R-Us can establish a strong market presence, increase barriers for new firms entering the market, and maintain their price above average cost without inviting immediate competition. It is a proactive approach that aims to secure their position as the dominant daycare center in the exclusive neighborhood.