Final answer:
Cooperative Advertising involves manufacturers sharing the cost of advertising with sellers to boost demand and sales for their products. It's not a form of reimbursement for failed advertising but a strategy used within monopolistic competition to distinguish products and potentially alter the perceived demand curve.
Step-by-step explanation:
Cooperative Advertising in Monopolistic Competition
Cooperative Advertising refers to a collaborative effort between manufacturers and channel members where manufacturers share the cost of advertising with the sellers of their product. The common misunderstanding that manufacturers reimburse channel members for advertising that fails is incorrect. Rather, cooperative advertising is typically a preemptive strategy, designed to stimulate demand and sales, and not a compensation method for unsuccessful sales efforts.
Within monopolistic competition, firms engage in advertising to differentiate their products from competitors, thereby affecting the demand curve. As noted by economist A.C. Pigou, at times, the advertising expenditures by competing firms could neutralize each other, leaving the market no different than if no advertising expenses had incurred. However, successful advertising can make a firm's perceived demand curve either more inelastic or shift the demand curve to the right, ultimately leading to increased quantities sold or higher prices, and thus, increased profits.
Yet, the reality highlighted by Pigou implies that increased sales or success due to advertising is not guaranteed. Instead, the industry might reach a state of equilibrium where advertising efforts by one firm are countered by those of another, leading to a market situation similar to one devoid of any advertising.