Advertising

Question 1

How many types of advertising are there?

Answer 1

1. Advertising as information
2. Advertising as persuasion

Question 2

How does adetising affect the profit function for a firm?

Answer 2

π(p, A) = (p - c)Q - P_AA

Where Q = f(p, A)

Q_p < 0, Q_A > 0

Question 3

What is the Lerner index?

Answer 3

The fact that monopoly markup = inverse of PED

Question 4

What is the Dorfman Steiner condition?

Answer 4

• That the profit maximising ratio of avertising to sales is equal t the monopoly markup multiplied by advertising elasticity of demand
• Advertising intensity = ^AED/_PED

Question 5

How can you prove the dorfman steiner condition and find the lerner index?

Answer 5

Question 6

How has the dorfman steiner prediction worked in history?

Answer 6

• Accurate prediction over the last 60 years
• consumer goods industries have high afvertising intensity
• building a brand reduces the PED
• Has even worked when the internet has been introduced

Question 7

What are the limitations of the dorfman steiner condition?

Answer 7

1. Does not capture any dynamic aspects
2. Intangible assets or goodwill appreciates through advertising
3. the model says nothing about how consumers respond to advertising

Question 8

What is the aim of persuasive advertising?

Answer 8

• increase the customers willingness to pay
• improves the intrinsic value of a good
• reduces the price elasticity of demand

Question 9

How can we model the effect of advertising on price elasticity of demand?

Answer 9

• preferences for a good are given by g(A)ø
• where g(0) = 1 where no ads
• g’(A) > 0, ^ads = ^preferences
• demand = Q(p, A) = 1 - ^P/g(A)
  *

Question 10

How does advertising affect welfare?

Answer 10

Dixit and Norman (1978)

• Begin at equilibrium, therefore π maximised already - this means <\π = 0
• Welfare depends on P
  
  • if prices rise, welfare falls
  • if prices fall, welfare improves

Question 11

What is the empirical evidence like for the impact of advertising on prices/welfare?

Answer 11

1. ​Benham - US study - lower prices in states where they were free to advertise
   
   • Method - cross sectional regression
   • Issue - no time data so couldnt complete a diff in diff analysis
2. Glazer (1981) - New York newspaper strike
   
   • Food sellers could not advertise as well
   • evidence of higher prices in non- advertising boroughs
   • Therefore advertising reduces prices
   • Would have been aminly informative though