“Last” class we talked about: Summary from last class • Price information, quality information. • To “educate” consumers? provide infor-
• But how informative is prime–time televi-
• Outside economics, people tend to think
advertising is about changing tastes. • Persuasive versus informative advertising. • Advertising is a big business. • U.S. advertiser collectively pay more than
all of the six countries that follow in spend-
• Second: Japan, Third: Germany. • Advertising provides 50% of revenues of
• We will study the effect advertising has on
prices, entry barriers and consumer welfare. – Search goods (quality can be judged by – Experience goods (quality can be judged – Credence goods (quality cannot be judged, Informational versus persuasive advertising • Informational advertising: describing prod-
uct’s objective characteristics (price, com-pare to rival’s prices, describe features, listuses). • Persuasive advertising: make claims to stim-
ulate purchase (cowboy riding into sunset),try and change consumers’ perception (repo-sition brand in product space: Dr Pepper). – Producers of search goods are more likely – Producers of experience goods are more
likely to use persuasive advertising. – Three times more advertising on expe- Profit–Maximizing Advertising
Advertising is designed to increase the demand
Marginal cost of advertising = Marginal benefit
More is advertised as the cost of advertising is
• By 1630 printing allowed wide–scale adver-
• Then radio and television. • These days even internet. Effect of Advertising on Welfare
Many social commentators attack advertising.
Yet it might be beneficial for consumers. • Price advertising increases welfare. • Advertising might solve the lemons prob-
But, there also might be too much spent on
Price advertising increases welfare • Truthful advertising informs consumers where
• Price advertising lowers market price (through
• Because it’s costly, firms only advertise when
• Empirical studies confirm this, sometimes
coupled with decline in quality (legal ser-
Advertising to solve the lemons problem • Suppose low and high quality goods are
indistinguishable at time of purchase (ex-
• Advertising might solve lemons problem if
• Repeated interactions necessary. • Once consumers buy the good they will
Excessive advertising
When products are differentiated, firm may en-
gage in too much advertising (both persuasive
• Unitl recently little could be said about ef-
• If advertising “changes” consumers’ tastes,
it’s tough to compare pre– and post–advertising
Advertising till marginal cost equals marginal
⇒ At equilibrium, a small decrease in advertis-ing increases welfare.
Too much is spent on advertising (in this model). Advertising as a barrier to entry
Persuasive advertising can be anticompetitive. • Consumers might fall prey to spurious prod-
• Potential entrants have to advertise exces-
sively to overcome goodwill created by the
• Depends on how long effects of advertising
False advertisement
SILENT KILLER SCRIPT OPENING TEASE—short bites, mix of footage, mix of people eating and others looking obviously hungryPINSTRUP-ANDERSEN: We have a silent killer and it’s called hunger…BECKMANN: World hunger is the Holocaust of our time. It is just absolutely a scandal that there are somany hungry people in our world. M'MBIJJEWE: For people to die of hunger, it's just abominable. It's
8.2 It has been hypothesized that silicone breast implants cause illness. In one study it was foundthat women with implants were more likely to smoke, to be heavy drinkers, to use hair dye, andto have had an abortion than were women in a comparison group who did not have implants. Usethe language of statistics to explain why this study casts doubt on the claim that implants causeillness. Sol