Selling Costs

Selling Costs:

Monopolistic competition is, indeed, a complicated market situation. The firm under monopolistic competition has to solve a series of difficult and complex problems. The firm under perfect competition, on the contrary, is confronted with one single problem, namely, how to adjust its output to the ruling market price. The firm has little or no say in the determination of the market price, which is fixed by the industry as a whole. The problem for the firm under a monopoly is slightly more difficult in so far as it has to fix not only its output but also the price at which it will sell its product to the consumers. The problem becomes still more complicated under monopolistic competition where the firm has not only to choose price and output but also to decide upon the quality (product-variation) to be produced and the amount of spent on sales-promotional activity (advertisement etc.). Thus, product variation and promotional activity are the two additional problems that a firm has to tackle under monopolistic competition.

The firm naturally incurs some expenditure on selling activity. This expenditure has been referred to as Selling Costs. Selling costs may be defined as those costs which are incurred by a firm to persuade customers to buy its product in preference to those of others. Prof. Chamberlin has defined selling costs as “costs incurred in order to alter the position or shape of the demand curve for a product.” Selling costs can take several forms, such as advertisement expenditures, salaries and allowances to salesmen, expenditures on display, etc. Adverstiemnst expenditure is, of course, the most important form of selling costs. Selling costs may also be incurred on the free supply of samples to prospective buyers. A publishing company supplies free specimen copies of its publications to the teachers in order to create demand for them.

Prof. Chamberlin distinguishes selling costs from production costs. Production costs may be defined as those costs which are incurred by a firm on the production of a given variety of a product. These costs include costs of raw materials, wages to the workers, power, etc., and expenditure incurred on packing, etc. The cost of transporting the product to the market is also a part of production costs. In other words, production costs include all those expenses which are incurred on the manufacture of the commodity and its transportation to the consuming centers. Selling costs, on the contrary, are those costs that are incurred in promoting the sale of the product in question. “The costs that must be incorrect to make a product, transport it and have it available to consumers with given wants are production costs. The costs of changing consumers’ wants are selling costs.” Though it is useful, this distinction cannot always be sharply made. There is no clear line of distinction between production and selling costs. An item of expenditure may legitimately be included in both costs. For example, attractive packaging of the product is an item that can be included in production as well as selling costs. It should, however, be remembered that such an item should be included either in production costs or in selling costs, not in both. Prof. Chamberlin, however, assumes that it is always possible to observe the distinction between production and selling costs. He also assumed that “selling costs” are synonymous with “advertisement expenditure”, because he uses the two terms interchangeably.

The advertisement expenditure plays no part in a perfectly competitive market because, under perfect competition, neither the knowledge is imperfect nor is there any kind of product differentiation. Hence the firm, under perfect competition, incurs no advertisement expenditure or selling costs; it incurs only production costs. Likewise, advertisement expenditure (or, selling cost) has little part to play under monopoly. But advertisement expenditure has a really very important role to play under monopolistic competition (and also in differentiated oligopoly). The reason is obvious. Under monopolistic competition, there is a large number of firms operating in the market: buyer’s knowledge is not perfect and there is a good deal of product differentiation.

There are two kinds of advertisements under monopolistic competition according to Prof. Chamberlin- Informative Advertisement and Manipulative Advertisement. The former refers to that type of advertisement that gives the consumers information that they would not have had if the firm had not provided it. This type of advertisement merely gives information to the consumers without attempting to persuade them to buy the product. Informative advertisement is useful for ordinary consumers because it helps them to make a rational choice of technical goods, such as a television set, a scooter, or a motor car. This type of advertisement may, however, help to increase the sales of all firms in the group, because it will enlighten the consumers on the potentialities of the product made by the group. Much of the advertisement, however, is not of this type. It is of the manipulative or persuasive type. The object of this type of advertisement is to persuade the consumers to buy the product of the firm in question in preference to the products of the rival firms. Manipulative advertisements do not give information but merely try to persuade consumers to change their attitude toward the product of the firm in question. For example, all the consumers know what toilet soap is, but the various competing firms persuade the consumers that their own particular brand is better than all the rest. The fundamental objective of manipulative advertisement is to maximize sales by attracting the consumer’s attention to the product.