Question

Tots-R-Us operates the only day-care center in an exclusive neighborhood just outside of Washington, D.C. Tots-R-uS is making substantial economic profit, but the owners know that new day-care centers will soon learn of this highly profitable market and attempt to enter the market. The owners decide to begin spending immediately a rather large sum on advertising designed to decrease elasticity. Should they wait until new firms actually enter? Explain how advertising can be employed to allow Tots-R-Us to keep price above average cost without encouraging entry.