Final answer:
Cooperative advertising is a partnership between a manufacturer and a retailer to share the cost of advertising. It is an important strategy in monopolistic competition for product differentiation and can affect consumer demand and pricing. However, similar efforts by competing brands could negate each other's impact.
Step-by-step explanation:
Cooperative advertising refers to a partnership between a manufacturer and a retailer wherein the manufacturer contributes to the advertising expenses incurred by the retailer, specifically for advertising the manufacturer's products locally. This could mean a direct monetary contribution to the retailer's advertising costs, or some larger scale arrangements depending on the businesses involved.
In the context of monopolistic competition, advertising plays a vital role in differentiating products from one firm's offerings to that of another. It can either render a firm's demand curve more inelastic, suggesting consumers' brand loyalty increases due to advertising, or it can cause a demand increase for the firm's products - both leading to potential increases in price and quantity sold.
While cooperative advertising is often beneficial, there's also the possibility that advertising efforts by competing brands cancel each other out if similar strategies are employed, resulting in no significant change in consumer preferences.