foreign [Music] advertising is part of our everyday lives and it is an industry which fuels countless others like search engines newspapers and television the economics of advertising seems straightforward businesses want to advertise in order to attract customers to come buy their product but we now have the tools to analyze this a little deeper and understand a few Mysteries such as why some companies advertise While others don't why you see advertisements for things you'd never buy and why some companies are willing to pay millions of dollars just to have a celebrity in their commercial advertising makes sense for firms with differentiated products and some Market power advertising is a way to increase demand for your product or to decrease the price elasticity of demand for your product increasing the demand for your product boosts sales and allows firms to raise the price they are charging you can increase Demand by reaching new customers or by encouraging your existing customers to raise how much they're willing to pay for your product you might do that by attacking a substitute or by enhancing your product with good branding or Style but another strategy is to decrease the price elasticity of demand for your product if you make your customers less responsive to price increases firms with Market power will be able to raise their price even higher to accomplish this you need to use the advertisement to convince your customers that your product is more of a necessity than a luxury or by advertising a trial period where you might be able to hook the customer onto your product advertising doesn't make sense for firms that make identical products it wouldn't make much sense for a single Farm to advertise their milk because those advertisements are just as likely to benefit their competitors as they are to benefit themselves so what is the deal with the famous got milk advertisements Those ads were produced by a Consortium which represented the interests of many Dairy Farmers it made sense for everyone to chip in and try to boost the demand for milk but not worth it for a single Dairy Farmer to try to do that by banding together it made fiscal sense to advertise what about those times when you see an advertisement for something you already have like when you see an ad for Coca-Cola We'll add a movie theater which only has Coca-Cola certainly they aren't trying to capture more market share instead this advertisement aims to reduce your elasticity of demand those Movie Theater prices are high and most reasonable people would respond by buying a lot less soda but by showing us a commercial where it's hot outside and a bunch of young happy people solve all their problems with a zesty beverage reminds us that we really can't go these couple hours without a Coke by our side let me guess now you want a Coke I'm sure all of you have seen an advertisement for a high-priced BMW but have you asked yourself why I mean maybe you're in a good position but my guess is that like me BMW is a little too expensive for your budget the mystery here is why BMW Waste money on advertisements with broad reach even when they know only a small fraction of the people who see it can even afford a BMW why not try more targeted advertisements which are cheaper and are aimed at populations where it's significantly larger fraction of the people who see them can afford a BMW the answer is they want to reduce the price elasticity of demand for people who can afford BMWs the way they do it is by making sure everyone knows that BMW is a symbol of high status they show us poor people the commercials so that we know we're supposed to confer that status onto BMW's customers I mean if the poor people don't know how great BMW is and weren't impressed by the people who drive one what would be the point of paying so much for one BMW is advertising for status so that their product is less dispensable to the people who buy them given the extraordinary success of Air Jordans it doesn't seem so peculiar that Nike was willing to offer so much money to Michael Jordan for his endorsement this one deal took Nike from an unknown shoe company to the industry leader but now that Nike is one of the most valuable brands in the world why do they still spend billions of dollars every year on Celebrity endorsements I mean does anyone out there not know about Nike and the products they sell just as it is for BMW advertising is part of the product Nike is selling if you buy Nike you know that those items will continue to be associated with the most talented athletes on the planet and hopefully a little of that magic will rub off on you too but it is interesting to note these two different reasons to advertise I also remember seeing these ads with former quarterback Kurt Warner for Arizona Federal Credit Union which aired during the Super Bowl what is the point of Arizona Federal shelling out a paycheck big enough to get Kurt Warner I mean doesn't everyone know Kurt is just doing it for the money celebrity endorsements can also be useful signals of quality it is hard to convince customers that you're a safe and reliable bank that they can trust of course Arizona Federal would claim to be trustworthy but how do we know signals are attempts to credibly convey information and in order for them to work it has to be hard to send a false signal if Arizona Federal wasn't a good bank they wouldn't have enough money to afford to pay Kurt Warner to appear in a commercial so when we see Kurt Warner it is a convincing signal that Arizona Federal is the real deal and we can trust them so those are some of the basics of the economics of advertising can you think of other reasons a company would want to advertise