Advertising As Information[1]

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Advertising As Information[1]

  1. 1. ADVERTISING AS INFORMATION PHILLIP NELSON JOURNAL OF POLITICAL ECONOMY, 1974 VASUTA KALRA 58 A, PGP1
  2. 2. <ul><li>One of the functions of Advertising is to provide Information to customers </li></ul>
  3. 3. WHY INFORMATION? <ul><li>Producers advertise to sell more and more of their product </li></ul><ul><li>This puts power in the hands of consumers over producers </li></ul><ul><li>Hence, advertisers provide information to consumers that would appeal to them </li></ul><ul><li>Nature of the power that consumers have, depends on the type of product being advertised </li></ul>
  4. 4. NATURE OF PRODUCT
  5. 5. SEARCH QUALITIES <ul><li>Consumer can determine prior to purchase </li></ul><ul><li>Through inspection </li></ul><ul><li>e.g. shape, size, colour </li></ul><ul><li>Here consumer has maximum market power over the content of advertising </li></ul><ul><ul><li>Facts are verifiable at point of purchase </li></ul></ul><ul><ul><li>Customer may not buy if he feels the advertisements misled him </li></ul></ul>
  6. 6. EXPERIENCE QUALITIES <ul><li>Consumer cannot determine prior to purchase </li></ul><ul><li>Through experience while using the product </li></ul><ul><li>Aims to relate the Brand to a function </li></ul><ul><li>e.g. taste, durability </li></ul><ul><li>Consumer power over market is relatively lower </li></ul><ul><ul><li>Facts not verifiable at point of purchase </li></ul></ul><ul><ul><li>Major control they have here is whether they repurchase the brand or not </li></ul></ul>
  7. 7. ACCORDING TO NELSON <ul><li>Advertising increases the probability of a consumer’s remembering the name of a brand </li></ul><ul><li>Brands which provide the highest utility have the highest incentive to advertise </li></ul><ul><li>Advertising increases as sales increase </li></ul>
  8. 8. MARGINAL REVENUE OF ADVERTISING TO PRODUCER <ul><li>To maximize profits, producers advertise to a point where: </li></ul><ul><li>Marginal revenue of advertising = Marginal cost of advertising </li></ul>
  9. 9. STIGLER’S THEORY
  10. 10. NELSON’S MODEL <ul><li>Probability of leaving the market is independent of the number of advertising messages that a consumer knows </li></ul><ul><li>The number of messages forgotten about a brand is directly proportional to the number of messages known about the brand </li></ul><ul><li>Assumption: </li></ul><ul><ul><li>The rate at which consumers confront an advertising message is constant for all consumers </li></ul></ul>
  11. 11. SEARCH & EXPERIENCE QUALITIES <ul><li>Marginal revenue behaviour is different for Search and Experience qualities </li></ul><ul><li>For search qualities, Advertising will increase sales only when it gives information to consumers that they did not have before </li></ul><ul><li>Firms advertising experience qualities will advertise MORE than firms advertising search qualities when both advertise </li></ul>
  12. 12. MARGINAL REVENUE OF ADVERTISING TO THE CONSUMER <ul><li>Consumer decision, in the quest for information, is a central determinant of behaviour of advertising </li></ul><ul><li>This depends on Marginal revenue </li></ul><ul><li>Marginal revenue > time cost to consumer to view the advertisement </li></ul><ul><li>This determines the amount and type of advertisement a brand will use. </li></ul>
  13. 13. <ul><li>Marginal revenue of information to the consumer for a good is the expected improvement in his utility as a result of using this information in his sampling of brands of this good </li></ul><ul><li>Experience goods – customers use “soft” information for evaluation </li></ul><ul><li>Search goods – “hard” or “soft” information </li></ul><ul><li>Hard information has greater value to the customer than soft value </li></ul><ul><li>Therefore, Marginal Revenue of advertisements to the consumer will be greater for search goods than for experience goods. </li></ul>
  14. 14. MARGINAL REVENUE OF ADVERTISING IN DIFFERENT MEDIA <ul><li>Positive relationship between the marginal revenue to consumer for an ad and the number of times he can see it </li></ul><ul><li>Newspapers & magazines: consumers can look at the advertisements as many times as they want </li></ul><ul><li>Advertisements in newspapers and magazines will provide higher marginal revenue to consumer than those in television or radio </li></ul>
  15. 15. DECEPTIVE ADVERTISING <ul><li>Providing misleading information to consumers </li></ul><ul><li>Projecting the utility of the goods as being higher than what it really is </li></ul><ul><li>Some qualities cannot be successfully conveyed by advertising e.g. “charm” of an apartment, ambience of a place. </li></ul><ul><ul><li>Here advertisers are tempted to exaggerate </li></ul></ul><ul><li>Ranks </li></ul><ul><ul><li>Different players in the same product category claim to be holding the same rank based on different surveys </li></ul></ul><ul><ul><li>Claims may not be genuine – confusion for consumers </li></ul></ul>
  16. 16. COSTS OF DECEPTIVE ADVERTISING <ul><li>Monetary loss </li></ul><ul><li>Time cost </li></ul><ul><li>Energy cost </li></ul><ul><li>Decline in credibility for future advertisements </li></ul><ul><li>No repurchase of brand </li></ul><ul><li>No customer loyalty </li></ul><ul><li>Loss of sales </li></ul><ul><li>TO CONSUMERS </li></ul><ul><li>TO PRODUCERS </li></ul>
  17. 17. ALTERNATIVE SOURCES OF INFORMATION <ul><li>Through samples </li></ul><ul><li>Recommendations of family, friends, consumer magazines </li></ul><ul><ul><li>Used more for goods with low frequency of purchase (durables) </li></ul></ul><ul><li>Consumers tend to trust these sources more than they trust the information given through advertisements </li></ul>
  18. 18. CONCLUSIONS OF STUDY <ul><li>Consumers believe that the more a brand advertises, the better buy it is </li></ul><ul><li>They are more likely to try out brands which are more heavily advertised </li></ul><ul><li>Vice – versa: Advertising increases as sales increase </li></ul><ul><li>Heavily advertised brands are more likely to provide a lower Price (per unit of the utility of the brand) </li></ul>

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