PROFIT AND ADVERTISING RELATIONSHIP BASED ON PRODUCT DIFFERENTIATION

Abstract

This paper investigates the positive relationship between profit and advertising based on product differentiation on imperfect oligopoly market. Differentiated product under these markets put pressure on manufacturers to produce high quality products. Advertising helps them to take advantages of economies of scale, absolute cost advantage and capital requirement on new entrance. The study is using firms’ data of certain specific manufacturers of heterogeneous products, through multiple regression, to prove that the positive relationship between profit rate and advertising is significant and still hold. By using the same data, the study could be able to relate the advantage of advertising for incumbent firms with barrier to entry for the new firms. In addition, the paper also highlights the view of ethical values of advertising based on Islamic perspective. The discussion focused on informative and educative advertising which is allowed in Islam and persuasive approach as well as manipulative advertising which is prohibited and immoral according to Islam.