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Principles of Economics- Mankiw (5th) 378

Principles of Economics- Mankiw (5th) 378 - drugstore you...

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388 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY important as the fact that consumers know ads are expensive. By contrast, cheap advertising cannot be effective at signaling quality to consumers. In our example, if an advertising campaign cost less than $3 million, both Post and Kellogg would use it to market their new cereals. Because both good and mediocre cereals would be advertised, consumers could not infer the quality of a new cereal from the fact that it is advertised. Over time, consumers would learn to ignore such cheap advertising. This theory can explain why firms pay famous actors large amounts of money to make advertisements that, on the surface, appear to convey no information at all. The information is not in the advertisement’s content, but simply in its exis- tence and expense. BRAND NAMES Advertising is closely related to the existence of brand names. In many markets, there are two types of firms. Some firms sell products with widely recognized brand names, while other firms sell generic substitutes. For example, in a typical
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Unformatted text preview: drugstore, you can find Bayer aspirin on the shelf next to a generic aspirin. In a typical grocery store, you can find Pepsi next to less familiar colas. Most often, the firm with the brand name spends more on advertising and charges a higher price for its product. Just as there is disagreement about the economics of advertising, there is dis-agreement about the economics of brand names. Let’s consider both sides of the debate. Critics of brand names argue that brand names cause consumers to perceive differences that do not really exist. In many cases, the generic good is almost in-distinguishable from the brand-name good. Consumers’ willingness to pay more for the brand-name good, these critics assert, is a form of irrationality fostered by advertising. Economist Edward Chamberlin, one of the early developers of the theory of monopolistic competition, concluded from this argument that brand names were bad for the economy. He proposed that the government discourage...
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