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2012 | OriginalPaper | Buchkapitel

15. Advertising

verfasst von : Victor J. Tremblay, Carol Horton Tremblay

Erschienen in: New Perspectives on Industrial Organization

Verlag: Springer New York

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Abstract

In consumer goods markets, advertising is almost as important as price competition. Every day firms bombard us with ads on television, radio, newspapers, billboards, and the Internet. A concern raised by critics is the amount of money spent on advertising. In the USA, for example, $280 billion dollars was spent on advertising in 2007. This amounts to about 2% of gross domestic product (GDP), money that could have been spent in other ways. Figure 15.1 plots annual advertising spending as a ratio of GDP from 1919 to 2007. The advertising/GDP ratio fluctuates over time but has hovered around 2% since the end of World War II.

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Vorheriges Kapitel Price Discrimination and Other Marketing Strategies

Nächstes Kapitel Advertising and Welfare

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Although the focus of this chapter is on advertising, the basic theories and models also apply to other marketing activities such as the firm’s decision to offer discount coupons and free samples. Much of the discussion in this chapter borrows from Bagwell’s (2007) excellent survey on the economics of advertising.

Firms in other countries also spend a great deal of money on advertising. For example, 1.2% of GDP was spent on advertising in Japan in 2005 (2005 Advertising Expenditures in Japan).

The data and forecasts derive from Advertising Age (http://www.advertisingage.com), Coan (1999) and Bernoff (2009). Coan (1999), and Bernoff (2009) expected Internet ads to reach a 20% share by 2014.

This is called a separating equilibrium. For further discussion of advertising as a signal of quality, see Kihlstrom and Riordan (1984), Milgrom and Roberts (1986), and Fluet and Garella (2002).

For example, the number of viewers more than doubled from 1967 to 2009.

Another theory indicates that persuasive advertising generates subliminal stimulation. This idea arose when James M. Vicary performed an experiment on movie patrons in the 1950s (Brean 1958). Without their knowledge, movie goers were exposed to the words “EAT POPCORN” and “DRINK COCA-COLA,” which were flashed on the screen for a fraction of a second in the middle of a film. According to Vicary, this led to 58% increase in popcorn demand and an 18% increase in Coke demand. This result could never be replicated, however, and subsequent research showed that the effectiveness of subliminal advertising is limited (Sheth et al. 1991, 60–62).

See http://www.cspinet.org.

In fact, Becker and Murphy (1993) call this complementary advertising.

Similar results are found by Campbell and Goldstein (2010) for beer and by Plassman et al. (2008) for wine.

Adolf Hitler’s Propaganda Minister, Joseph Goebbels, understood this, arguing that “if you repeat a lie often enough, people eventually come to believe it.”

The variance can be quite pronounced. In a study reported in the Wellness Letter, University of California at Berkeley (December 1993), local brands of diet foods had an average of 85% more calories that indicated on their labels. This compared to 25% more for regional brands. Nationally advertised brands had fairly accurate calorie counts.

As one might expect, Klein and Leffler (1981, note 18) found that parents were more likely to purchase a name brand pain reliever for their children than themselves (i.e., the market share of generics was 7% for adult pain relievers and 1% for child pain relievers).

Recall that an externality occurs when one economic agent affects another economic agent without compensation. In this case, firm i’s advertising benefits firm j without firm j compensating firm i.

Constructive advertising is sometimes called cooperative advertising, and combative advertising is also known as predatory advertising.

Here, we assume that the rotation point lies in the positive p–q quadrant.

Chamberlin (1933) and Aislabie and Tisdell (1988) also address the issue of advertising and demand rotation. For a discussion of how consumer information can cause a nonparallel shift in demand, see Comanor (1985).

Johnson and Myatt point out that this terminology applies to any marketing change. As we saw in Chap. 13, a change in a product’s physical design could appeal to the masses or to a niche group of consumers and rotate demand accordingly.

For reviews of the literature, see Clark (1976), Seldon and Doroodian (1989), Boyd and Seldon (1990), Leone (1995), and Bagwell (2007). In a recent experimental study done at Yahoo, Lewis and Reiley (2009) found that Internet ads generated an increase in sales in excess of 11 times the amount spent on advertising. They also found that the effect of an ad dissipated after several weeks.

For further discussion of this separability issue, see Iwasaki and V. Tremblay (2009).

For further discussion, see Greer (2002) and V. Tremblay and C. Tremblay (2007).

For reviews of the literature, see Scherer and Ross (1990) and Seldon et al. (2000).

For further discussion of commodity checkoff programs and generic advertising, see Ward (2006), Crespi (2007), and Isariyawongse et al. (2007, 2009).

This last condition assures that the firm’s second-order condition of profit maximization is met.

See Varian (2010) for further discussion of the value of the marginal product and the marginal factor cost for an input.

From the chain rule, which is discussed in the Mathematics and Econometrics Appendix at the end of the book, this equals (∂C/∂q)(∂q/∂A).

By construction, the quantity intercepts and optimal output levels are the same in both diagrams for D₁ and D₂.

As we discuss in Appendix 15.A, a firm will also invest more in advertising when it is better able to increase product goodwill today and into the future.

Recall that in this model, the Herfindahl–Hirschman index of industry concentration equals 1/n.

This is found by maximizing joint profit with respect to A ₁ and A ₂ and solving the first-order conditions simultaneously for the optimal values of advertising.

See Iwasaki et al. (2008) for further discussion.

We use a partial derivative because other factors, such as word of mouth information, may also affect search costs and are implicitly assumed to be constant.

Notice that firm participation requires that 3α – s _i + s _j > 0. In other words, firm i will exit the market if its search costs are too high relative to the search costs of firm j.

To derive a specific solution, we would need a specific function for s _i(A _i). Because ∂² s _i/∂A _i ² > 0, second-order conditions hold when the participation constraint is met [(3α – s _i + s _j) > 0].

The marginal revenue of advertising must also have a negative slope, which occurs when ∂² s _i/∂A _i ² is sufficiently close to zero.

This model derives from V. Tremblay and Polasky (2002).

To ensure that second-order conditions of profit maximization are met, advertising is assumed to change product image at a decreasing rate. That is, ∂² θ ₁/∂A ₁ ² > 0 and ∂² θ ₂/∂A ₂ ² < 0.

Second-order conditions are assumed to hold, which implies that the marginal revenue functions have a negative slope.

Second-order conditions of profit maximization are assumed to hold. This requires that advertising changes perceived quality at a decreasing rate. That is, ∂² z _i/∂A _i ² < 0.

Second-order conditions of profit maximization are assumed to hold. This requires that advertising increases the error term at a decreasing rate. That is, ∂² e _i/∂A _i ² < 0.

This is because the marginal revenue of advertising is greater for firm 1, given that φ ₁ > φ ₂. Because firm 1 invests more on advertising in equilibrium, e ₁ will exceed e ₂. Thus, the marginal revenue of advertising for firm 2 will be negative unless φ ₂ is sufficiently large. If not, only firm 1 will invest in advertising, as in the previous example.

Recall that constructive advertising is more likely for new brands or products, which may account for the different results for the US cigarette industry.

When all firms are of equal size, the Hirfindahl–Hirschman index equals 0.16 when the four-firm concentration ratio equals 64%.

The countries are France, Germany, Italy, Japan, the UK, and the USA. The homogeneous-goods group consists of bread, flour, processed meat, salt, sugar, and canned vegetables, which had advertising-to-sales ratios below 1%. The advertising-intensive group includes frozen food, soup, margarine, soft drinks, ready-to-eat breakfast cereal, mineral water, sugar confectionery, chocolate confectionery, roast and ground coffee, biscuits, pet food, baby food, and beer.

Subsequent work provides further support for Sutton’s findings. These include studies by Robinson and Chiang (1996) for a sample of US consumer goods industries, Matraves (1999) for the global pharmaceutical industry, Symeonides (2000b) for UK manufacturing, Berry and Waldfogel (2010) for the US newspaper industry, and V. Tremblay and C. Tremblay (2005) for the US brewing industry.

Recall from Chap. 2 that this means that the discount factor (D) equals 1. That is, $1 received in 1 year is valued at $1 today.

More formally, dynamic programming methods should be used to solve this problem, as discussed in the Mathematical and Econometrics Appendix.

This makes use of the chain rule, as discussed in the Mathematical and Econometrics Appendix.

Of course, if previous advertising builds up considerable goodwill today, this may enable the firm to advertise less today (if it reduces the current marginal benefit of advertising).

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Titel: Advertising
verfasst von: Victor J. Tremblay
Carol Horton Tremblay
Verlag: Springer New York
Buch: New Perspectives on Industrial Organization
Print ISBN: 978-1-4614-3240-1

Electronic ISBN: 978-1-4614-3241-8

Copyright-Jahr: 2012
DOI: https://doi.org/10.1007/978-1-4614-3241-8_15

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