Principles of Economics- Mankiw (5th) 376

Principles of Economics- Mankiw (5th) 376 - 386 PA R T F I...

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386 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY CASE STUDY ADVERTISING AND THE PRICE OF EYEGLASSES What effect does advertising have on the price of a good? On the one hand, ad- vertising might make consumers view products as being more different than they otherwise would. If so, it would make markets less competitive and firms’ demand curves less elastic, and this would lead firms to charge higher prices. On the other hand, advertising might make it easier for consumers to find the firms offering the best prices. In this case, it would make markets more com- petitive and firms’ demand curves more elastic, and this would lead to lower prices. In an article published in the Journal of Law and Economics in 1972, economist Lee Benham tested these two views of advertising. In the United States during the 1960s, the various state governments had vastly different rules about adver- tising by optometrists. Some states allowed advertising for eyeglasses and eye examinations. Many states, however, prohibited it. For example, the Florida law
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