Discuss the role of product differentiation and advertising in monopolistic competition.

Firms acquire market power through product differentiation, distinguishing their products from similar products offered by competitors. Product differentiation promotes market power by convincing consumers that a particular firm's product is superior to the products offered by its rivals. One way to create differentiation is through advertising. Successful advertising increases demand for a firm's product and makes its demand more inelastic. Although advertising increases costs, if the increase in revenue from sales generated by advertising exceeds the cost, the firm's profit will increase.

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