The Economics of Advertising

Introduction

• Advertising is integral to daily life and sustains industries like search engines, newspapers, and television.
• Companies advertise to attract customers and boost sales.

Purposes of Advertising

Differentiated Products

• Increases demand for a product.
• Decreases price elasticity of demand:
  • Allows firms to raise prices as customers become less responsive to price increases.
• Strategies:
  • Reach new customers.
  • Encourage existing customers to pay more.
  • Attack substitutes or enhance product appeal.
  • Convince customers product is a necessity.

Identical Products

• Not sensible for individual firms to advertise.
• Example: 'Got Milk?' advertisements:
  • Produced by a consortium of dairy farmers, not individual ones.
  • Aim to boost overall demand for milk.

Types of Advertising

Brand Loyalty

• Coca-Cola in movie theaters:
  • Doesn't aim to capture market share.
  • Tries to reduce price elasticity by associating brand with necessity.

Status Symbol

• BMW commercials:
  • Target broad audiences, including those who can't afford the product.
  • Aim to reduce price elasticity by promoting BMW as a status symbol.

Celebrity Endorsements

• Nike and Michael Jordan:
  • Initially boosted Nike's brand value.
  • Continues to maintain association with talented athletes.
• Arizona Federal Credit Union and Kurt Warner:
  • Celebrity endorsements serve as quality signals.
  • Demonstrates financial stability and trustworthiness to customers.

Summary

• Companies use advertising to increase visibility, enhance product appeal, and signal quality.
• Advertisements serve different purposes based on the product type and market strategy.

Discussion

• Consider other reasons and strategies companies might use to advertise.