Advertising An Economic Perspective Comm 3444 Advertising Society Today s Focus The role of advertising in our economy How does advertising affect the price of a new car A latt at How does advertising affect the way that you spend your Starbucks money Next time How does advertising affect media content 2005 per capita ad spending US Economic Effects of Advertising Two schools of thought 1 Advertising market power 2 Advertising market competition Power or Information Market Power Market Information Adv persuades consumer to select brand differentiation Power or Information Market Power Market Information Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Power or Information Market Power Market Information Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Higher prices Increased profits Power or Information Market Power Market Information Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Higher prices Higher barriers to entry and more market power Increased profits Power or Information Market Power Market Information Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Higher prices Increased profits Higher barriers to entry and more market power Less competition Fewer available products higher price Power or Information Market Power Market Information Advertising provides info Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Higher prices Increased profits Higher barriers to entry and more market power Less competition Fewer available products higher price Power or Information Market Power Market Information Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Advertising provides info Informed consumers increased price sensitivity Higher prices Increased profits Higher barriers to entry and more market power Less competition Fewer available products higher price Power or Information Market Power Market Information Advertising provides info Informed consumers increased price sensitivity Lower prices Reduced market power more competition Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Higher prices Increased profits Higher barriers to entry and more market power Less competition Fewer available products higher price Power or Information Market Power Market Information Advertising provides info Informed consumers increased price sensitivity Lower prices Reduced market power more competition Lower barriers to entry Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Higher prices Increased profits Higher barriers to entry and more market power Less competition Fewer available products higher price Power or Information Market Power Market Information Adv persuades consumer to select brand differentiation Advertising leads to brand loyalty Higher prices Increased profits Higher barriers to entry and more market power Advertising provides info Informed consumers increased price sensitivity Lower prices Reduced market power Lower barriers to entry Less competition More competition More innovation Fewer available products higher price More product alternatives lower price Power or Information Market Power Market Adv persuades consumer to select brand differentiation Information Advertising provides basic info Problems with market power model Assumes advertising as sole cause Problems with market information Advertising leads to brand loyalty Informed consumers increased price sensitivity Company raises prices Lower prices Increased profits Reduced market power model Assumes rational consumer Assumes quality info What do you think Higher barriers to entry and more market power Lower barriers to entry Less competition More competition More innovation Fewer available products higher price More product alternatives lower price Advertising Market Power Advertising Market Information Or both Depends on product Convenience vs nonconvenience goods How does advertising affect price Some evidence Retail advertising Can lead to more competition lower prices National advertising price sensitivity decreases Brand loyalty Cost of doing business increases Does advertising influence aggregate consumption Research is mixed on this Bottom line Is advertising beneficial to the economy Harmful Social waste No clear answer to this question strong disagreement among experts Now you have the info to draw your own informed conclusion