1. Economics of Advertising
In 2003 Microsoft spend $150 million on an advertising campaign to promote its latest
version of Microsoft office (Nat Ives, “New York times, October 21,2003, p.6). That
amount was five times as much as it spent promoting an upgrade in 2001. What are the
possible economic explanations for this increase in expenditure? Does Microsoft action
necessarily imply that it feared its competitors more than in previous years? Explain the
economics of advertising and discuss Microsoft investment in advertising.
Introduction
This essay explains the economics of advertising given reason why Microsoft leaderin
themarket for computer software as well as Internet explorer and software application
advertiseto boost profit. Microsoft invest astonish sum of money in advertising campaign
for the products they manufactory as a strategy to promote them. The author would give
reason for that by defining monopoly and explaining what a monopolist firm aim to
achieve with advertising campaign.Finally a discussion on Microsoft investment in
advertising will be drawnand the conclusion presented.
The economics of advertising studies begunin the 19th
century with the development of
mass production, the development in transport and communication were also propitious
for economics of advertisingestablish process in the economy.During that period firms
saw in advertisement a tool that helped to stimulate demand for the goods they produce.
Furthermore advertisingshift the demand curve and influenciats consumers taste and
preference.
Advertising is very important for any business it alsoplays a very preponderant role in the
economy.
According to Bagwell (2001) advertising is seen as a feature of a modern economy.
Indeed a successful way to approach consumers and provide them with information
regarding a product, and also persuade consumers to buy that is easily done in a daily
basis thought communication methods such as TV, Radio, Internet, and magazine, Lefts,
Poster.
Advertising changes the way the economy functions, firms advertise to increase its profit.
Though advertising firms are able to inform, persuade,alter consumers taste and
preference.In addition by providing consumer informationregarding a new product, or of
different form of using it or even by saying that particular people such as celebrities uses
that creates on consumers a need and want for that particular product. The fact that every
consumer maximize their well being (utility) subject to their budget constrain would lead
to consumer to change its preference the decision to buy one product rather then another
is based on their preference. The demand and supply for a product would be affected by a

2. change in preference or taste. Consequently an utility function for the new product would
be created, as the consumer would allocate a sum of their budget to buy that product in
order to experience certain level of satisfaction.
Advertising would increase the level of risk and uncertainty in economy by changing
consumer‟s preference. Therefore the problems of imperfectinformation and knowledge
that most of start up firms face would act as a barrier of entry in that market.in addition
adverting also increase the cost of the firm, Microsoft spent more in an advertising
campaign in 2003 then in 2001 the reasons could be the fact that the company aim to
reinforce the notion that the product they supply is unique and also to perhaps create
brand loyalty and profit maximize (mr=mc).
Microsoft has a monopoly of the operating system software market. A monopoly is a sole
provider of a good or product for which there are not close substitute in the market.
Microsoft achieved its monopoly power for three reasons, first by being the first supplier
of operating system in the world. Secondlythe government granted Microsoftpatent,
patents acts as a barrier of entry to other companies to enter the market and allow
Microsoft to earn above normal profit. Moreover in a perfect competitive market earning
above normal profit would attract firm into the market, in a monopoly situation that does
not happen because of the barriers of entry and also as Microsoft usedits cost advantage
when its first launch the OP system at very low price most entrepreneurs were not
interested in enter into their market because as a new venture their cost would be higher.
In addition producers of hardware (personal computers adhere to provide their product in
combination with a Microsoft product. Microsoft is producer of complementarygoods.
Complementary goods are set of goods consumed together, for instance the demand for
software will depend on the demand for hardware, in the last two decade theprice of
personal computer come down, more Microsoft products were bought, the demand for
these products increased.
Microsoft has a natural monopoly because it can supply the market at lower cost then any
other firm. In theory a firm that has a natural monopoly would not need to advertise, as it
has no competition.However a monopoly and an imperfect competitive player as
Microsoft does to promote their products to reinforce their market position, and to
maximize their profit.
Economics Advertising clearly has benefit for firms and consumers however as it raises
the firm‟s cost and the output price in an economics point of view it is inefficient.
Consumers allocate their scarce resource in order to maximize their well being on the
other hand firms decision to produce particular goods are based on maximizing their
profit by producing at lowest cost.
To conclude economics of advertising is very important for any business, its aim is to
promote, inform and persuade consumer of a good or service in the market using

3. different communication methods. In addition advertising allows firms for instance such
as Microsoft a monopoly to create brand loyalty, reach a larger number of consumers,
and earn above normal profit. However in an economics point of view the negative aspect
of advertising would be the fact that its rises input and output prices going against the
economics purpose of allocating scarce resources in an efficient manner.
Reference/Bibliography
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