EFMD EQUIS CREDITED Industrial organization Lecture 6 器 Advertising 學火旦 于 udan university
Binglin Gong Fudan University Industrial Organization Lecture 6 Advertising
Advertising Everywhere We watch advertising on Tv, listen to advertising on the radio, read ads in newspapers in magazines on outdoor billboards on buses and trains receive a large amount of so-called junk mail. and we transmit advertising via word-of-mouth and by wearing brand-name labels on our clothes Product placement(植入广告)
Advertising Everywhere • We watch advertising on TV, listen to advertising on the radio, read ads in newspapers, in magazines, on outdoor billboards, on buses and trains, receive a large amount of so-called junk mail, and we transmit advertising via word-of-mouth and by wearing brand-name labels on our clothes. • Product placement (植入广告)
网阙
Advertising Advertising is generally defined as a form of providing information about prices, quality, and location of goods and services Advertising differs from other forms of information transmissions (like stockexchange data and guidebooks) in two respects: First, the information is transmitted by the body who sells the product, and second the buyer does not al ways have to pay to receive the information(or pays a little with his or her value of time of watch a tv ad or to sort out the relevant ads in the sunday newspaper)
Advertising • Advertising is generally defined as a form of providing information about prices, quality, and location of goods and services. • Advertising differs from other forms of information transmissions (like stockexchange data and guidebooks) in two respects: First, the information is transmitted by the body who sells the product, and second, the buyer does not always have to pay to receive the information (or pays a little with his or her value of time of watch a TV ad or to sort out the relevant ads in the Sunday newspaper)
Advertising expenditure It is generally estimated that developed economies spend more than 2 percent of their GNPs on advertising(see Schmalensee 1972, 1986) The expenditure of firms on advertising is generally measured in terms of advertising expenditure divided by the value of sales. These ratios vary drastically across products and industries. The ratio of advertising expenditure to sales varies a lot across industries and firms
Advertising Expenditure • It is generally estimated that developed economies spend more than 2 percent of their GNPs on advertising (see Schmalensee 1972, 1986). • The expenditure of firms on advertising is generally measured in terms of advertising expenditure divided by the value of sales. These ratios vary drastically across products and industries. The ratio of advertising expenditure to sales varies a lot across industries and firms
Advertising expenditure There have been many attempts to correlate industry types, product characteristics, geographical locations and other characteristics with advertising -to-sales ratios. However, in most cases advertising still remains a mystery Since neither empirically nor theoretically can we explain why different firms spend different amounts on advertising
Advertising Expenditure • There have been many attempts to correlate industry types, product characteristics, geographical locations, and other characteristics with advertising-to-sales ratios. However, in most cases advertising still remains a mystery since neither empirically nor theoretically can we explain why different firms spend different amounts on advertising
Advertising expenditure Adams and brock(1990) report that the big three car producers in the United states, which are ranked among the largest advertisers in the country, happen to have different advertising-to-sales ratios In 1986 the largest producer, Gm(which spent $285 million on advertising ) spent $63 per car, whereas Ford spent $130 and Chrysler spent $113 per car (though they spent less overall than GM) This may hint of economies of scale in car advertising
Advertising Expenditure • Adams and Brock (1990) report that the Big Three car producers in the United States, which are ranked among the largest advertisers in the country, happen to have different advertising-to-sales ratios. • In 1986 the largest producer, GM (which spent $285 million on advertising), spent $63 per car, whereas Ford spent $130 and Chrysler spent $113 per car (though they spent less overall than GM). • This may hint of economies of scale in car advertising
Kaldor(1950): advertising is"manipulative"and reduces competition and therefore reduces welfare Advertising would persuade consumers to believe wrongly that identical products are differentiated because the decision of which brand to purchase depends on consumers' perception of what the brand is rather than on the actual physical characteristics of the product. Therefore, prices of heavily advertised products would rise far beyond their cost of production Advertising serves as an entrydeterring mechanism since any newly entering firm must extensively advertise in order to surpass the reputation of the existing firms. Thus, existing firms use advertising as an entry-deterrence strategy and can maintain their dominance while keeping above-normal profit levels
• Kaldor (1950): advertising is "manipulative" and reduces competition and therefore reduces welfare. • Advertising would persuade consumers to believe wrongly that identical products are differentiated because the decision of which brand to purchase depends on consumers' perception of what the brand is rather than on the actual physical characteristics of the product. Therefore, prices of heavily advertised products would rise far beyond their cost of production. • Advertising serves as an entrydeterring mechanism since any newly entering firm must extensively advertise in order to surpass the reputation of the existing firms. Thus, existing firms use advertising as an entry-deterrence strategy and can maintain their dominance while keeping above-normal profit levels
Telser(1964), Nelson(1970, 1974), and Demsetz (1979), proposed that advertising serves as a tool for transmitting information from producers to consumers about differentiated brands thereb reducing consumers' cost of obtaining information about where to purchase their most preferred brand
• Telser (1964), Nelson (1970, 1974), and Demsetz (1979), proposed that advertising serves as a tool for transmitting information from producers to consumers about differentiated brands, thereby reducing consumers' cost of obtaining information about where to purchase their most preferred brand