Advertising’s Economic Impact: Views, Competition, and Effects
The Economics of Advertising: An Analysis
1. Three Views of Advertising Economics:
The three views of advertising economics that have evolved are: Informative view, persuasive view, and complementary view. Advertising affects demand by exerting a complementary influence on the consumer’s utility function with the consumption of the advertised product.
2. Main Impact of Advertising on Society’s Economy:
The typical expected effects are to raise sales, maintain them over time, and improve the general image of the firm. Advertising logically follows listening to consumer requirements, introducing productive conditions, and distributing the goods, leading to different subcultures.
3. Industry-Level Market Competition and Advertising’s Effects:
Business Cycle: Advertising speeds up the diffusion of new goods. It prepares and accompanies the phase of take-off, when a “dominant design” defines the final form of a good.
Market Competition:
- Oligopolists: Few powerful sellers, increasing market share and demand rise.
- Perfect Competition: Large consumer market (same product sold by many firms) – spillover effect (individually). At the industry level, market demands increase, helping new entrants and causing prices to decrease.
- Monopoly: Low consumer market – to generate awareness.
4. How Informative Advertising is Used:
Informative advertising is a promotional effort to generate interest in a good, service, or organization by providing consumers with information. It is often used to generate a good reputation for the business running the ads or correct any mistaken impressions. It creates a brand image for the company and allows the potential customer to feel in control to make their own informed decisions. Types of advertising include mobile, email spam, digital signage, online display advertising, and unpaid advertising. An example is the auto industry.
5. Model of Informative Advertising: Billboard Advertising
Billboard advertising is one of the simplest models of informative advertising. Supply is a function of open land, and demand is derived from the demand for the product the advertisers are selling. The economics of how roadside billboards are used to inform the public. When the supply of billboards is higher, the greater the informative advertising. It comes in a variety of forms, including mobile billboards.
6. How Persuasive Advertising Affects Products:
Persuasive advertising assumes that the consumer already understands the basic nature of the product. It convinces the consumer of the benefits that set a particular product apart from the competition. Marginal benefit of product A > Marginal benefit of product B, leading to opportunity cost.
7. How Advertising Affects the Economy:
Advertising makes jobs, reduces selling costs, increases company profits, increases company security, and speeds up consumption.
8. Microeconomics vs. Macroeconomics:
Microeconomics: The object of interest is a single (or small number of) household or firm.
Macroeconomics: The object of interest is the entire economy. We care mostly about: 1. Growth 2. Fluctuations