The Economics of Advertising Anthony J. Pennings, PhD New York University
3 Roles of Advertising• Persuasive• Informative• Complementary• Informative?
What is Advertising?Advertising informs the perception ofgoods and services to influenceconsumers and to reassure investors aswell as distributors and retailers
Advertising Industry Structure• Advertising traditionally has been dominated by four major conglomerate holding companies: – Omnicom and Interpublic of New York – WPP of London – Publicis of Paris• These advertising groups account for some 250,000 employees and own subsidiaries spread among many countries throughout the world
Advertising Industry Structure• Google quickly became a powerhouse in the advertising field reaching revenues of over US$20 billion by 2010
Why Advertise?Advertising is best seen within a context ofcompeting against other companies withsimilar goods or services for sale. It isuseful for companies that may want toincrease competitive advantage in acrowded market
Why Advertise?The more competition in an environment, the more the need to advertise?O – market structure
John Kenneth Galbraith• As a famous economist on modern industrial society Galbraith pointed out the two major reasons for advertising: – Manipulate market demand – Guard against sudden shifts in demand
MySpace vs. FacebookAdvertising or technological innovation?
Why AdvertiseDetermine what brands rather than what products people will buy
Why Advertise?Differentiate a productDraw attention to brands
Why Advertise?• As a barrier to entry to gain competitive advantage• Impose high start-up costs on new entrants• Especially in a digital environment? – No natural economies of scale to ward off competitors
Why Advertise?• Brand proliferation• Pepsi One, Coke Zero