Chapter 28 The Economic Analysis of Advertising
TL;DR: A comprehensive survey of the economic analysis of advertising can be found in this article, with a focus on positive and normative theories of monopoly advertising, price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry.
Abstract: This chapter offers a comprehensive survey of the economic analysis of advertising. A first objective is to organize the literature in a manner that clarifies what is known. A second objective is to clarify how this knowledge has been obtained. The chapter begins with a discussion of the key initial writings that are associated with the persuasive, informative and complementary views of advertising. Next, work that characterizes empirical regularities between advertising and other variables is considered. Much of this work is conducted at the inter-industry level but important industry studies are also discussed. The chapter then offers several sections that summarize formal economic theories of advertising. In particular, respective sections are devoted to positive and normative theories of monopoly advertising, theories of price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry. At this point, the chapter considers the empirical support for the formal economic theories of advertising. A summary is provided of empirical work that evaluates the predictions of recent theories of advertising, including work that specifies and estimates explicitly structural models of firm and consumer conduct. This work is characterized by the use of industry (or brand) and even household-level data. The chapter then considers work on endogenous and exogenous sunk cost industries. At a methodological level, this work is integrative in nature: it develops new theory that delivers a few robust predictions, and it then explores the empirical relevance of these predictions at both inter-industry and industry levels. Finally, the chapter considers new directions and other topics. Here, recent work on advertising and media markets is discussed, and research on behavioral economics and neuroeconomics is also featured. A final section offers some concluding thoughts.
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TL;DR: In this article, the authors introduce the concept of ''search'' where a buyer wanting to get a better price, is forced to question sellers, and deal with various aspects of finding the necessary information.
Abstract: The author systematically examines one of the important issues of information — establishing the market price. He introduces the concept of «search» — where a buyer wanting to get a better price, is forced to question sellers. The article deals with various aspects of finding the necessary information.
3,790 citations
1,549 citations
TL;DR: In this paper, the authors argue that even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages, and therefore favor thoughtfully pro-compatibility public policy.
Abstract: Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power – over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such “competition for the market” or “life-cycle competition” can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct efficiency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers' and complementors' expectations hinge on non-efficiency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later “tips” to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another's existing customers, and so also discourage more aggressive entry. Because of these competitive effects, even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy.
770 citations
TL;DR: This article analyzed a consumer credit marketing field experiment in South Africa, where the bank offered loans with repayment periods ranging from 4 to 18 months, and deadlines for response were randomly allocated from 2 weeks to 6 weeks.
Abstract: This brief summarizes what's advertising content worth? Evidence from a consumer credit marketing field experiment in South Africa. The bank offered loans with repayment periods ranging from 4 to 18 months. Deadlines for response were randomly allocated from 2 weeks to 6 weeks. Firms spend billions of dollars developing advertising content, yet there is little field evidence on how much or how it affects demand. The author analyze a direct mail field experiment in South Africa implemented by a consumer lender that randomized advertising content, loan price, and loan offer deadlines simultaneously. The author fined that advertising content significantly affects demand. Although it was difficult to predict ex ante which specific advertising features will matter most in this context, the features that do matter have large effects. Showing fewer example loans, not suggesting a particular use for the loan, or including a photo of an attractive woman increases loan demand by about as much as a 25 percent reduction in the interest rate. The evidence also suggests that advertising content persuades by appealing 'peripherally' to intuition rather than reason. Although the advertising content effects point to an important role for persuasion and related psychology, our deadline results do not support the psychological prediction that shorter deadlines may help overcome time-management problems; instead, demand strongly increases with longer deadlines.
560 citations
TL;DR: In this article, the authors propose a framework for analyzing transformations of demand, which frequently stem from changes in the dispersion of consumers' valuations, which lead to rotations of the demand curve.
Abstract: We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers' valuations, which lead to rotations of the demand curve. In many settings, profits are a U-shaped function of dispersion. High dispersion is complemented by niche production, and low dispersion is complemented by mass-market supply. We investigate numerous applications, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand.
401 citations
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Book•
01 Jan 1890
TL;DR: In this article, the authors present a survey of the general relations of demand, supply, and value in terms of land, labour, capital, and industrial organization, with an emphasis on the fertility of land.
Abstract: BOOK I: PRELIMINARY SURVEY 1. Introduction 2. The Substance of Economics 3. Economic Generalizations or Laws 4. The Order and Aims of Economic Studies BOOK II: SOME FUNDAMENTAL NOTIONS 1. Introductory 2. Wealth 3. Production, Consumption, Labour, Necessaries 4. Income. Capital. BOOK III: ON WANTS AND THEIR SATISFACTION 1. Introductory 2. Wants in Relation to Activities 3. Gradations of consumers' demand 4. The elasticity of wants 5. Choice between different uses of the same thing. Immediate and deferred uses. 6. Value and utility BOOK IV: THE AGENTS OF PRODUCTION. LAND, LABOUR, CAPITAL AND ORGANIZATION T 1. Introductory 2. The Fertility of Land 3. The Fertility of Land, continued. The Tendency to Diminishing Return. 4. The Growth of Population 5. The Health and Strength of the Population 6. Industrial Training. 7. The Growth of Wealth 8. Industrial Organization 9. Industrial Organization, continued. Division of Labour. The Influence of Machinery 10. Industrial Organization, continued. The Concentration of the Specialized Industries in Particular Localities. 11. Industrial Organization, continued. Production on a Large Scale 12. Industrial Organization, continued. Business Management. 13. Conclusion. Correlation of the Tendencies to Increasing and to Diminishing Return BOOK V: GENERAL RELATIONS OF DEMAND, SUPPLY, AND VALUE 1. Introductory. On Markets. 2. Temporary Equilibrium of Demand and Supply 3. Equilibrium of Normal Demand and Supply 4. The Investment and Distribution of Resources 5. Equilibrium of Normal Demand and Supply, continued, with reference to long and short periods 6. Joint and Composite Demand. Joint and Composite Supply 7. Prime and total cost in relation to joint products. Cost of marketing. Insurance against risk. Cost of Reproduction. 8. Marginal costs in relation to values. General Principles. 9. Marginal costs in relation to values. General Principles, continued 10. Marginal costs in relation to agricultural values 11. Marginal costs in relation to urban values 12. Equilibrium of normal demand and supply, continued, with reference to the law of increasing return 13. Theory of changes of normal demand and supply, in relation to the doctrine of maximum satisfaction 14. The theory of monopolies 15. Summary of the general theory of equilibrium of demand and supply BOOK VI: THE DISTRIBUTION OF THE NATIONAL INCOME 1. Preliminary survey of distribution 2. Preliminary survey of distribution, continued 3. Earnings of labour 4. Earnings of labour, continued 5. Earnings of labour, continued 6. Interest of capital 7. Profits of capital and business power 8. Profits of capital and business power, continued 9. Rent of land 10. Land tenure 11. General view of distribution 12. General influences of progress on value 13. Progress in relation to standards of life
11,519 citations
Book•
01 Jan 1988
TL;DR: The Theory of Industrial Organization as discussed by the authors is the first primary text to treat the new industrial organization at the advanced-undergraduate and graduate level Rigorously analytical and filled with exercises coded to indicate level of difficulty, it provides a unified and modern treatment of the field with accessible models that are simplified to highlight robust economic ideas.
Abstract: The Theory of Industrial Organization is the first primary text to treat the new industrial organization at the advanced-undergraduate and graduate level Rigorously analytical and filled with exercises coded to indicate level of difficulty, it provides a unified and modern treatment of the field with accessible models that are simplified to highlight robust economic ideas while working at an intuitive level To aid students at different levels, each chapter is divided into a main text and supplementary section containing more advanced material Each chapter opens with elementary models and builds on this base to incorporate current research in a coherent synthesis Tirole begins with a background discussion of the theory of the firm In part I he develops the modern theory of monopoly, addressing single product and multi product pricing, static and intertemporal price discrimination, quality choice, reputation, and vertical restraints In part II, Tirole takes up strategic interaction between firms, starting with a novel treatment of the Bertrand-Cournot interdependent pricing problem He studies how capacity constraints, repeated interaction, product positioning, advertising, and asymmetric information affect competition or tacit collusion He then develops topics having to do with long term competition, including barriers to entry, contestability, exit, and research and development He concludes with a "game theory user's manual" and a section of review exercises
9,777 citations
TL;DR: In this article, the authors extend activity analysis into consumption theory and assume that goods possess, or give rise to, multiple characteristics in fixed proportions and that it is these characteristics, not goods themselves, on which the consumer's preferences are exercised.
Abstract: Activity analysis is extended into consumption theory. It is assumed that goods possess, or give rise to, multiple characteristics in fixed proportions and that it is these characteristics, not goods themselves, on which the consumer’s preferences are exercised.
9,495 citations
TL;DR: In this article, Pettengill tests whether there is an excessive number of firms in a monopolistically competitive equilibrium by a device of considerable expository merit, and redistributes the resources thus released equally over the remaining firms in the sector, to see if welfare can be improved.
Abstract: Pettengill tests whether there is an excessive number of firms in a monopolistically competitive equilibrium by a device of considerable expository merit. He removes one firm, and redistributes the resources thus released equally over the remaining firms in the sector, to see if welfare can be improved. To do this correctly, we write n, for the equilibrium number of firms and xe for the output of each. With fixed cost a and constant average variable cost c, removing one firm releases (a + Cxe) of resources, and this enables the output of each of the remaining ( I) firms to be increased (a + c Xe )/(1fl 1)}. The quantity xo of the numeraire good is unaffected by this, and the utility function (equation (31) of our paper) is
6,161 citations