What is advertising?
Advertising is one of the main ways of establishing a brand. They are used for search goods and experience goods.
For search goods, advertisings primary aim is to provide information, including info about price in many cases.
Assume: raising the proportion of people who know about the product.
The implication of advertising existence
- No impact of advertising on the price elasticity of demand at any given price, unless certain consumers differentially informed ( which may be the case).
The general implication of advertising
Advertising will reduce prices, if anything, in the case of search goods, because it makes people more aware of the goods, so economizing on their own search,
Persuasive advertising - the impact of it
Remember Diagram - a Possible rightward shift in demand.
Demand is less elastic with respect to price after the advertising - so we may expect the price to rise.
Dorfman Steiner Model (for a monopolist) is for persuasive advertising.
Dorfman Steiner Result
Advertising to tales ratio will be higher in industries where the marginal productivity of advertising is higher ( has more impact).
And in industries where demand for the firm’s product is rather inelastic with respect to price.
Of course, marginal productivity is likely to differ across advertising formats, dependent on the type of good.