Wednesday, June 23, 2010

Why advertise? Notes from an economics class

Today, I am studying for my field exam (which is next Friday). As I was scouring my notes, the first few lines in my notes on advertising struck me as blog-worthy. It turns out that economists have given quite a bit of thought to the question of "Why advertise?"

Here's what is in my notebook:

There are different notions of advertising.

1. Informative (Stigler '61, Butters '77). This type of advertising is socially beneficial, and it more important for search characteristics (observable before consumption like price or color) than for experience characteristics (product has to be consumed first like taste or suitability).

2. Signal (Kihlstrom and Riordan '84). By advertising, can separate from others, but it has to be costly to signal etc.

3. Complementary Goods (Becker and Murphy '93)...


Then, my notes launch into some math that explains how Becker and Murphy approach the problem. Instead of presenting the math, here's what I wrote about Becker and Murphy's argument in January:
In a world where everyone thinks that the pre-movie advertising is a nuisance, why show any advertising after the lights dim? In 1993, Gary Becker and Kevin Murphy wrote a paper that answers this question. From their analysis, it turns out that advertising can be a good or a bad from the perspective of the consumer, but it can work in either case. Take two examples of advertising that works:

1. Beer advertisements on television usually work by giving us a good laugh that causes us to remember the product the next time we show up at the store. In fact, one of the reasons that people watch the Super Bowl is to see the new advertisements. This is an example of advertising as a good. To most people, it isn't surprising that this works.

2. The beggar on the street with the cardboard sign makes you feel terrible (it enters negatively into your utility function to walk past him), so you put money in his box. People will cross the street (or change their walking route) to avoid beggars. They'll rarely cross the street to happen across the beggar to give him money. This is an example of advertising that is a bad, but works nonetheless.
It's time for me to return to my studying. Next topic: Search.

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