L21: Advertising

Question 1

lack of advertising in most product markets

Answer 1

consumers may not know a product exists, product quality or their WTP

Question 2

economic theories of advertising

Answer 2

persuasive and informative view

both affect demand curve but implications for consumer welfare are different

Question 3

persuasive view

Answer 3

consumer induced to buy something that might not maximise utility

creates barriers to entry by increasing brand loyalty which leads to less competition

advertising in this view is bad since we are buying things we don’t need

Question 4

informative view

Answer 4

advertising used to convey information to consumers
- helps consumers make decisions that improve their utility and welfare

pro-competitive consequences
- with more information, competition increases since consumers know or are aware of more goods that are available

Question 5

split cable experiments - Lodish et al, 1995 and Abraham and Lodish, 1990

Answer 5

exposing different households to different advertising intensity

if advertising works, effects show within six months
- but if no effects show within the first six months, further advertising has no impact

persistent effect of advertising
- builds up and depreciates with time

Question 6

the (lack of) returns to advertising - Hitsch et al, 2020

Answer 6

looking at returns of advertising and seeing whether advertising affects demand

mostly null effects when estimating effects using county borders in DMA boundaries
- only a few positive values where advertising increases sales

find that around 70% of products have negative returns on investment

Question 7

super returns to superbowl ads - Stephens-Davidowitz et al, 2017

Answer 7

estimates returns to advertising during the Superbowl

basic idea is that ads are decided before the championship finals, and fans of qualifying teams are much more likely to watch the game

Question 8

advertising as endogenous sunk cost - Sutton, 1991

Answer 8

looking at what happens to concentration as market size grows relative to set-up costs
- sunk costs typically limit entry
- investing a lot in advertising helps to deter entrance and increases market power

larger markets allow firms to advertise more which ends up increasing concentration sine they deter entrance

Question 9

advertising as entry deterrence

Answer 9

increases demand for current period and not the next one so potential entrant waits until next period to enter

if advertising has dynamic effects and generates loyalty/inertia, the effect on rival profits is persistent

Question 10

entry accommodation using advertising - will there be over or under investment in advertisement?

Answer 10

incumbent overinvests with accommodation - fat cat strategy
- when competition is relaxed, incumbent profits are higher
- induce entrant to price high to relax competititon
- to achieve that, invest substantially so own demand increases
- more demand and competition is lower

incumbent wants to deter entrant - lean and hungry strategy
- entrant profits lower when competition is strengthened so incumbent wants to be aggressive
- to intensify competition, induce entrant to price low
- to achieve that, invest little so own demand decreases (smaller market)

Question 11

information asymmetries: adverse selection problem

Answer 11

advertising fixes information asymmetries and inefficiencies by providing information

asymmetric information can lead market transactions to break down (used car market)

Question 12

signaling model

Answer 12

high-quality sellers communicate quality by providing credible signals
- credible signals as actions that low quality sellers cannot afford to take

if you advertise a lot, you provide a credible signal of the quality of the good