產(chǎn)業(yè)組織理論課件：Lecture 11 Advertising

1、產(chǎn)業(yè)組織理論Theory of Industrial Organization Lecture 11 Advertising OutlineThe Social Benefits of AdvertisingThe Social Costs of AdvertisingAdvertising and Market StructureAdvertising as a Barrier to EntryEmpirical EvidenceKEY TERMSAdvertising response function廣告反應(yīng)函數(shù)Convenience goods便利商品Information adver

2、tising信息性廣告Experience goods體驗(yàn)性商品Persuasive advertising勸說(shuō)性廣告Search goods搜尋性商品Shopping goods選購(gòu)商品Simultaneity bias聯(lián)立性偏誤The Social Benefits of Advertisinginformational and persuasive advertising Informational advertising provides consumers with truthful information about price, location, or qualityMost

3、newspaper, magazine, and direct mail advertising is informational, as is much Internet advertising. Newspapers and the Internet in particular are full of advertisements emphasizing priceGrocery stores contend that they are the “l(fā)ow-price leader.” Department stores announce major sales. Automobile de

4、alers advertise rebates and low-cost or zero-cost credit. These are examples of procompetitive informational advertisinginformational and persuasive advertisingEmpirical evidence suggests that advertising about price, referred to as price advertising, results in lower pricesTwo separate studies foun

5、d that eyeglass prices were significantly lower in markets that permitted optometrists to advertise than in markets that prohibited advertisingSimilarly, prescription drug prices are lower in states that permit price advertisinginformational and persuasive advertisingArterburn and Woodbury found tha

6、t magazine advertising tended to increase the level of price competition for shopping goods such as furniture and appliancesShopping goods are relatively expensive goods that are distinguished from convenience goods , which are relatively inexpensive items that are purchased on a regular basis, such

7、 as soft drinks, cigarettes, and gasolinePorter found that local newspaper advertising has a procompetitive effect by reducing the profits of convenience goods advertised in newspapersinformational and persuasive advertisingBrown and Goolsbee found that the introduction of Internet comparison shoppi

8、ng sites （網(wǎng)絡(luò)對(duì)比購(gòu)物網(wǎng)站）in the term life insurance market （定期人壽保險(xiǎn)市場(chǎng)in the United States was associated with a price reduction of 815 percentInternet comparison shopping sites are not the same thing as traditional firm advertising of a particular product or service; however, these sites do provide increas

9、ed advertised price informationinformational and persuasive advertisingAdvertising may help manufacturers take advantage of economies of scale in production and distributionOn April 3, 2010, Apple sold its first iPad. Apple informed consumers about the iPad well in advance of its first sale Steve Jo

10、bs introduced the product at a widely publicized press conference on January 27, 2010. The first television commercial was broadcast on March 7, 2010, Apple then began taking pre-orders a few days later on March 12, 2010informational and persuasive advertisingIf Apple had been prevented from adverti

11、sing, it is doubtful it could have sold enough iPads to quickly take advantage of production economies of scaleWithout pre-sale advertising, it would have been impossible for Apple to sell 300,000 iPads on the products first day of availabilityThe Apple iPad example suggests that early marketing and

12、 advertising may encourage increased investment in research and development by helping manufacturers rapidly inform consumers of new technologically advanced products and to find a large pool of potential first-time buyersinformational and persuasive advertisingAdvertising provides a social benefit

13、by subsidizing the mass media（主流媒體）. Most of the revenues received by newspapers, magazines, radio, and television are from advertisingImagine what the Sunday New York Times would cost without advertising revenues. The price would be prohibitive to most consumers. In fact, there would not be a Sunda

14、y New York Times without advertisingThe significant decline in the number of daily newspapers in the United States is due in large measure to the transfer of advertising dollars from newspapers to the Internetinformational and persuasive advertisingFinally, advertising is an entertaining art form（娛樂(lè)

15、藝術(shù)載體）, and some of it is quite goodThe best, or worst, advertising often becomes part of modern cultureWalter Mondale adapted a Wendys advertising campaign to be the cornerstone of his 1984 presidential campaign （總統(tǒng)競(jìng)選）when, in reference to economic policy, he asked Ronald Reagan, “Wheres the Beef?”T

16、he Social Costs of AdvertisingThe Social Costs of AdvertisingIn 2007 over $277 billion was spent on advertising by American-owned corporations in the United StateAs a point of comparison, in 2007 the United States federal government spent just $5.7 billion on its Temporary Aid to Needy Families (TAN

17、F) programProcter & Gamble spent over $4 billion in 2009 to advertise its soaps and other products. The opportunity cost of these advertising expenditures raises questions about whether much of this spendings would have been better spent on AIDS research, health care, education, or new infrastructur

18、eThe Social Costs of AdvertisingFew economists argue that informational advertising creates serious economic waste. The complaints center on persuasive advertisingPersuasive advertising is designed to create a subjective positive reaction to a product. Much of the advertising on television is persua

19、siveBeautiful people drive fast, good-looking automobiles. Kids love the experience of going to McDonalds to see Ronald McDonaldThe Social Costs of AdvertisingThe list of commercials aimed at creating subjective image differences is endless. Many of these advertisements are entertaining but provide

20、relatively little informationConversely, many television commercials mix information with persuasion, as when General Motors advertises that its electric Volt car can be simply plugged into any regular wall socketFurthermore, all advertisements add some information by announcing that the product is

21、available to consumersAdvertising as a Barrier to EntryPersuasive advertising may provide valuable information about the quality of experience goodsExperience goods are those whose qualities can be identified only through trial after buying the goodCommon examples include consumer nondurable conveni

22、ence goods such as beer, toothpaste, soap, toiletries, and cereal, and consumer durable goods such as refrigerators and washing machinesAdvertising as a Barrier to EntryExperience goods are distinguished from search goods , whose qualities can be judged before purchase through prepurchase testingSea

23、rch goods include fresh fruits and vegetables, which can be squeezed and smelled to test for freshness; fresh meats, which can be viewed; shoes, which can be tried on; and sofas and chairs, which can be sat onWhich effect of persuasive advertising is more significant: the purely persuasive effect de

24、signed to create a subjective positive reaction with questionable social benefits, or the informational effect with social benefits? Advertising and QualityIn the 1970s, Nelson presented an alternative theory. Nelsons argument can be simplified and explained by considering two producers of toothpast

25、eBoth toothpastes contain fluoride and have the American Dental Association seal of approval, but the high-quality toothpaste tastes wonderful, and the low-quality toothpaste tastes horribleThe costs of production are equal for both products. Toothpaste is an experience good, so consumers cannot det

26、ermine quality (taste) unless they buy the toothpasteAdvertising and QualityThe horrible-tasting toothpaste producer can induce consumers to buy its product once, but few will buy a second timeThe wonderful-tasting toothpaste producer, however, can depend on many repeat purchases.The producer of the

27、 high-quality toothpaste has a much greater incentive to advertise because advertising will result not only in initial purchases but in repeat purchasesAdvertising and QualityThe low-quality toothpaste manufacturer has little incentive to advertise because advertising will result in initial purchase

28、s but no repeat purchasesThe present value of profitis lower for a low-quality toothpaste that advertises than for a low-quality toothpaste that doesnt advertiseLarge advertising expenditures by the high-quality toothpaste manufacturer signal consumers that it produces a high-quality product, becaus

29、e only high-quality producers advertise extensivelyAdvertising and QualityAccording to this theory, Philip Morris initially spent a huge amount to advertise Miller Lite beer because Philip Morris knew that Miller Lite was a high-quality product that consumers would be willing to buy againIf Philip M

30、orris had thought that Miller Lite was a low-quality product, it would not have wasted its scarce advertising resources on a known loserThe Miller Lite do not provide any systematic reliable statistical evidence in support of Nelsons theory but they do suggest how the theory might play out in real-w

31、orld marketsAdvertising and QualityWithin a decade of Nelsons introduction of the theory that persuasive advertising signaled high quality, his theory came under serious criticism from several important economists.Schmalensee argued that a firm producing a low-quality product at a very low cost migh

32、t find it profitable to advertise extensively if it could sell the low-quality product at a high enough price to first-time buyerseven if those first-time buyers never bought the product againAdvertising and QualitySchmalensees argument revolves around the size of the pricecost mark-up for the low-q

33、uality productIf the mark-up is high enough, the producer of the low-quality product might spend more on advertising than the producer of a high-quality productMilgrom and Roberts made another important contribution to the debate. They theorized that high prices as well as high advertising expenditu

34、res might be used to signal high qualityAdvertising and QualityGiven these criticisms of Nelsons theory, the issue of whether high advertising expenditures signal high quality became largely an empirical question, and unfortunately for Nelsons theory, a majority of the subsequent empirical results h

35、ave not been supportive of his predicted positive relationship between advertising expenditures and product qualitySeveral studies have relied on product quality ratings derived from Consumer Reports magazineAdvertising and QualityFor the full sample of 196 products, there was no statistically signi

36、ficant positive correlation between either product quality and product-category advertising or product quality and brand advertisingIn fact, the median correlations between the quality and advertising measures were very low0.08 for product quality and product-category advertising, and 0.05 for produ

37、ct quality and brand advertisingAdvertising and Market StructureAdvertising and Market StructureWe have seen that advertising can be associated with both positive and negative economic and social effects. In addition, increased advertising can result in either an increase or decrease in market power

38、This section examines a number of major theories that have been advanced concerning the relationship between market structure and advertising, beginning with the relationship between advertising and monopoly and then examining the relationship between advertising and oligopolyWelfare Effects of Adve

39、rtisingSo does advertising increase or decrease welfare? This is a complicated question that economists have attempted to answer for decadesOne of the most important and controversial attempts to shed light on the issue was made by Dixit and Norman in 1978. They analyzed the welfare effects of adver

40、tising under monopoly, oligopoly, and monopolistic competitionTheir conclusions were the same for all three market structures; however, we will analyze only the monopoly case, which is the easiest to presentWelfare Effects of AdvertisingAn increase in advertising expenditures of E increases demand f

41、rom D to DA and increases the monopolists profit-maximizing output from q0 to qA and profit-maximizing price from p0 to pA If welfare is based on preadvertising demand curve D, advertising increases the monopolists profit by the sum of the three shaded areas A + B + C minus the monopolists advertisi

42、ng expenditures The increase in price results in a decrease in consumer surplus and welfareAdvertising and Market StructureThe main conclusions from these studies:Firms with little market power have low price-cost margins and should have low advertising-to-sales ratiosAs a firms price-cost margin in

43、creases, so should its advertising-to-sales ratio.Oligopolists will have larger advertising-to-sales ratios than monopolists or competitive firmsOligopolists may tend to engage in excessive advertisingAdvertising as a Barrier to EntryAdvertising as a Barrier to EntryThere may be an absolute cost adv

44、antage for incumbent firms associated with the cumulative effects of advertisingBecause advertising generally has an effect on future as well as current demand, it must be viewed as an investment rather than a current expenditureSuccessful advertising campaigns have impacts far into the future. If t

45、he impact of advertising is cumulative, entrants have to overcome not only current advertising efforts but also the impact of past campaigns by established firmsComparison of an Incumbents and an Entrants Advertising Response FunctionThe entrants advertising response function is first horizontal, th

46、en rises at an increasing rate, then rises at a decreasing rate, and finally decreasesAn incumbent firm has no threshold level of advertising because the cumulative effect of previous advertising campaigns ensures that current advertising has an impact on sales; therefore, the incumbent has a higher

47、 level of sales for any given level of advertising expendituresAdvertising as a Barrier to EntryOnce thethreshold level is reached, the marginal impact of additional advertising messages increases, then the marginal impact decreases, and finally the marginal impact becomes negative as consumers beco

48、me tired of the advertising campaign and respond with a negative backlashAn incumbent firm has no threshold level of advertising because the cumulative effect of previous advertising campaigns ensures that current advertising has an immediate impact on salesAdvertising as a Barrier to EntryBecause t

49、he impact of previous advertising has not been completely depreciated, the incumbent firm will have a higher level of sales for any given level of advertising expendituresThis results in lower average advertising expenditures for incumbents than for established firmsThe threshold level of advertisin

50、g expenditures for entrants is a sunk cost associated with entry and creates an entry barrier because incumbent firms have paid this sunk cost in the pastAdvertising as a Barrier to EntryIf the threshold level of advertising is large, the sunk costs of entry will rise significantly and the capital b

51、arrier to entry will increaseHigh sunk costs result in a more or less permanent advantage for first movers over late entrants.Even a financially strong entrant may find it difficult to overcome the sunk costs of entry. Kodak learned this lesson when it attempted to enter the consumer battery industr

52、yEmpirical EvidenceEmpirical EvidenceIn theory, advertising can have a positive or negative impact on prices, profits, and welfareInformative advertising tends to have a positive impact, whereas persuasive advertising tends to have a negative impactTo distinguish between informative and persuasive a

53、dvertising, most studies have classified goods into different categories based on their characteristics and the way they are marketedEmpirical EvidenceExperience goods include consumer nondurable convenience goods such as beer, toothpaste, soap, toiletries, and cerealSearch goods include fruits and

54、vegetables, shoes, and sofas and chairsTheory suggests that much of the advertising associated with experience goods is persuasive, and much of the advertising associated with search goods is informationalEmpirical EvidenceAnother important distinction is between manufacturers advertising and retail

55、ers advertisingManufacturers advertising tends to emphasize persuasion and the importance of brand loyalty, whereas retailers advertising is more likely to emphasize lower pricesA great deal of manufacturers advertising is through television and radio, whereas most retailers advertising appears in t

56、he print mediaGiven these characteristics, manufacturers advertising is more likely to have anticompetitive effects, and retailers advertising is more likely to have a positive impactEmpirical EvidenceAdvertising may erect an entry barrier that enables firms to earn high profits, and high profits ma

57、y enable firms to spend large amounts on advertisingStatistical investigations of the relationship between profits and advertising, therefore, may suffer from simultaneity bias The studies noted below generally assume that causation runs from advertising to profi tability; that is, advertising creat

58、es an entry barrier that enables firms to earn high profitsEmpirical EvidenceMost recent empirical work on the impact of advertising on market structure and performance has used the methodology of the new empirical industrial organization to analyze the impact of advertising on firm behavior in spec

59、ific marketsAdvertising, therefore, was almost entirely predatory because it impacted only the relative market shares of the two firms but had no impact on total demandEmpirical EvidenceFor example, Gasmi, Laffont, and Vuong examined the price and advertising competition between Coca-Cola and Pepsi-

60、Cola from 1968 to 1986They investigated which of four alternative models best explained the behavior of Coke and Pepsi and found that the Stackelberg model with Coke as the Stackelberg leader in both price and advertising worked bestGasmi, Laffont, and Vuong estimated both the impact of a 1 percent