Advertising Themes

The intellectual contribution of the proposal is to broaden the base of economic models of advertising in three directions (described below). The broader impact is in closer integration between the fields of Economics and Marketing.

The first part (“Advertising Attributes”) assumes that advertising may enhance consumer valuation of charaderistics. However, when a firm advertises a charaderistic of its product, this also raises the perceived quality of other rival products that have the charaderistic. There are thus positive externalities in advertising (a "Raise-all-boats" effect) as well as the more traditional negative externalities from business stealing that come from advertising of products with dissimilar charaderistics. One preliminary result from this analysis is that at most one firm will advertise any characteristic. The analysis is also useful for rephrasing the theory of product differentiation in terms of patterns of complementary qualities. Lancaster's theory of demand can also be reframed from this perspedive.

The second part (“Economics of Attention”) addresses the problem of breaking through advertising clutter caused by other advertisers. The upshot can be an equilibrium where firms must advertise heavily because others are doing so: they are "Shouting to be Heard" - There may also be equilibria with a much lower volume of advertising, and a broader range of message senders. However, an information intermediary has an incentive to encourage a large volume. With competitive pricing of information access, a tax can be optimal to curtail excess message breadth and depth; but this prescription needs to be adjusted if there is market competition among message senders. Competition can give equilibria with price dispersion and inter-industry spillovers (across the equilibrium price distributions) in competing for attention.

The third part (“Advertising: the Persuasion Game”) aims to frame the classic quality disclosure game squarely as a model of advertising (and so expand the rather limited stable of economic models of advertising), by introducing price and horizontal charaderistics into the marketing decision. The experience good version of the model indicates that a larger degree of horizontal information should be imparted by low-quality firms. The search good version is more elaborate, and includes the decision of advertising price. Price is less likely to be advertised by high-quality firms.

Some data from airline ads in newspapers and magazines, and from analgesics ads on TV, are to be analyzed in tandem with the theoretical analysis. These should be especially helpful with the first and third parts of the project.