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Posted ContentDOI

The economic analysis of advertising

01 Jan 2005-Research Papers in Economics (Department of Economics, Columbia University)-Vol. 3, pp 1701-1844
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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Citations
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Posted Content
TL;DR: It is shown that corporate social responsibility (CSR) and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures, and this evidence is consistent with the view that CSR activities can add value to the firm but only under certain conditions.
Abstract: This paper shows that corporate social responsibility (CSR) and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures. For firms with low customer awareness, the relation is either negative or insignificant. In addition, we find that the effect of awareness on the value-CSR relation is reversed for firms with a poor prior reputation as corporate citizens. This evidence is consistent with the view that CSR activities can add value to the firm but only under certain conditions.

1,411 citations


Cites background or result from "The economic analysis of advertisin..."

  • ...The notion that advertising provides information about the firm goes back at least to Nelson (1974) (see also Bagwell 2007 for a review of the literature). More recently, relating advertising to CSR, McWilliams and Siegel (2000, 2001) suggested that CSR-related advertising and media coverage may increase consumer awareness of CSR. This, in turn, increases the demand for socially responsible behavior and the returns to engaging in such behavior. They did not, however, formally model or test this conjecture. All these arguments lead to our main prediction that the impact of CSR activities on the value of the firm will be positively related to advertising intensity. We note that this prediction does not imply that firms need to advertise their CSR activities (as suggested by McWilliams and Siegel 2000, 2001); all that is required is that advertising intensity leads to increased awareness of the firm, including its CSR activities. Our prediction differs from the predictions derived from Schuler and Cording’s (2006) model. Schuler and Cording (2006) also argued that information intensity is one of the key elements in the CSR–value relation. Their argument relies on the dissemination of CSR information by the firm or other parties. This could happen through advertising, but it is likely that most advertising does not directly speak to the firm’s CSR activities. Moreover, Schuler and Cording’s (2006) argument would only apply to firms with particular...

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  • ...The notion that advertising provides information about the firm goes back to at least to Nelson (1974) (see also Bagwell (2007) for a review of the literature)....

    [...]

  • ...The notion that advertising provides information about the firm goes back at least to Nelson (1974) (see also Bagwell 2007 for a review of the literature). More recently, relating advertising to CSR, McWilliams and Siegel (2000, 2001) suggested that CSR-related advertising and media coverage may increase consumer awareness of CSR. This, in turn, increases the demand for socially responsible behavior and the returns to engaging in such behavior. They did not, however, formally model or test this conjecture. All these arguments lead to our main prediction that the impact of CSR activities on the value of the firm will be positively related to advertising intensity. We note that this prediction does not imply that firms need to advertise their CSR activities (as suggested by McWilliams and Siegel 2000, 2001); all that is required is that advertising intensity leads to increased awareness of the firm, including its CSR activities. Our prediction differs from the predictions derived from Schuler and Cording’s (2006) model....

    [...]

  • ...The notion that advertising provides information about the firm goes back at least to Nelson (1974) (see also Bagwell 2007 for a review of the literature). More recently, relating advertising to CSR, McWilliams and Siegel (2000, 2001) suggested that CSR-related advertising and media coverage may increase consumer awareness of CSR. This, in turn, increases the demand for socially responsible behavior and the returns to engaging in such behavior. They did not, however, formally model or test this conjecture. All these arguments lead to our main prediction that the impact of CSR activities on the value of the firm will be positively related to advertising intensity. We note that this prediction does not imply that firms need to advertise their CSR activities (as suggested by McWilliams and Siegel 2000, 2001); all that is required is that advertising intensity leads to increased awareness of the firm, including its CSR activities. Our prediction differs from the predictions derived from Schuler and Cording’s (2006) model. Schuler and Cording (2006) also argued that information intensity is one of the key elements in the CSR–value relation....

    [...]

Journal ArticleDOI
TL;DR: In this paper, the authors show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.
Abstract: Bayesian consumers infer that hidden add-on prices (e.g., the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors' customers. However, if add-ons have close substitutes, a "curse of debiasing" arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.

956 citations

Journal ArticleDOI
TL;DR: In this article, the authors show that corporate social responsibility and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures, and that the effect of awareness on the CSR-value relation is reversed for companies with a poor prior reputation as corporate citizens.
Abstract: This paper shows that corporate social responsibility (CSR) and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures. For firms with low customer awareness, the relation is either negative or insignificant. In addition, we find that the effect of awareness on the CSR–value relation is reversed for firms with a poor prior reputation as corporate citizens. This evidence is consistent with the view that CSR activities can add value to the firm but only under certain conditions. This paper was accepted by Bruno Cassiman, business strategy.

868 citations

References
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01 Jan 1972

15,741 citations


Additional excerpts

  • ...123See McFadden (1974)....

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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

Book ChapterDOI
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


"The economic analysis of advertisin..." refers background in this paper

  • ...17 Drawing on Lancaster’s (1966) characteristic approach to consumer behavior, Nichols interprets Z as the level at which a characteristic is enjoyed, when the market good is consumed at level X and advertised at level A....

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Journal ArticleDOI
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

Journal ArticleDOI
TL;DR: In this article, the authors argue that consumers lack full information about the prices of goods, but their information is probably poorer about the quality variation of products simply because the latter information is more difficult to obtain.
Abstract: Consumers are continually making choices among products, the consequences of which they are but dimly aware. Not only do consumers lack full information about the prices of goods, but their information is probably even poorer about the quality variation of products simply because the latter information is more difficult to obtain. One can, for example, readily determine the price of a television set; it is more difficult to determine its performance characteristics under various conditions or its expected need for repairs. This article contends that limitations of consumer information about quality have profound effects upon the market structure of consumer goods. In particular, monopoly power for a consumer good will be greater if consumers know about the quality of only a few brands of that good. This is a significant departure from the literature. Economists have long been interested in the determinants of monopoly power, but studies have always concentrated on the production function or market-size variables. I try to show that consumer behavior is also relevant to the determination of monopoly power in consumer industries. Location theory has also ignored the consumer's lack of information. Since many trips to a store are, in part, quests for information, the location of retail stores can be profoundly affected by consumer efforts to acquire information. I shall also try to show that advertising and inventory policy are affected by consumer ignorance about quality differences among brands. All of these impacts of consumer ignorance have remained unexplored because economists have not developed a systematic analysis of consumer quests for information about quality differences. Information about quality differs from information about price because the former is usually more expensive to buy than the latter. Indeed this is one reason we expect the variance in the utility of quality facing a consumer to be greater than the variance in the utility of price. This difference in the price of information can lead to fundamentally

5,548 citations


"The economic analysis of advertisin..." refers background or result in this paper

  • ...42 This is also consistent with Nelson’s (1975) finding that the relationship between advertising and profitability is negative for search goods, though the relationship is not significant....

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  • ...To develop this argument, Nelson (1970) makes a distinction between search and experience goods....

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  • ...42 This is also consistent with Nelson’s (1975) finding that the relationship between advertising and profitability is negative for search goods, though the relationship is not significant. 43 Following Telser (1969a) and Demstez (1979), it may be shown that the accounting profit rate overstates the true profit rate if the accounting profit rate exceeds the growth rate of advertising capital....

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  • ...In response to the anti-competitive interpretation of advertising under the persuasive view, Nelson (1974b) makes the pro-competitive argument that advertising, when properly understood, is informative....

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  • ...I turn next to a pair of insightful papers by Nelson (1970, 1974b).11 He begins with a simple question: How, exactly, does advertising provide information to consumers?...

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