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Lecture23_Advertising2_Econ121_Fall2010

Lecture23_Advertising2_Econ121_Fall2010 - Lecture 23...

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Click to edit Master subtitle style  4/28/11 Lecture 23 Advertising Continued Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban
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 4/28/11 Question BMW series 5 versus Nissan Sentra Which would you expect to have a greater price elasticity? Which would you expect to have a greater advertising-to-sales ratio? Is your experience consistent with this expectation?
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 4/28/11 Advertising Softens Price Competition Example: Crest versus Colgate 1998: P&G paid for full page newspaper ads comparing P&G’s Crest Multicare with Colgate’s Total Ad acknowledged that Colgate Total “helps reduce and prevent gingivitis and reduce plaque” while its own product did not Ad claimed that P&G’s product had a
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 4/28/11 Advertising Softens Price Competition Why would P&G tout a benefit of a competitor’s product? May be in P&G’s own interest First, praising Colgate’s product may make it more difficult for Colgate to challenge the other claims Second, one important effect of the ad is to increase consumers’ perception of differences between
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 4/28/11 Advertising Intensifies Price Competition Duopoly Homogeneous good Willingness to pay = V Consumers don’t know the price charged by each firm; they have to visit a firm to find out price Best strategy: choose a firm at random and buy the product if P <= V
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 4/28/11 Advertising Intensifies Price Competition Both firms know consumer valuations So set price = V Higher prices drive demand to zero Lower prices do not increase demand
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 4/28/11 Advertising Increases Price Competition Now suppose firms advertise their prices Consumers now know prices Leads to Bertrand like equilibrium Advertising drives demand elasticity such that firms go from monopoly profits (extracting all the surplus) to zero profits (consumers getting all the surplus)
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 4/28/11 Advertising Increases Price Competition This kind of advertising happens all the time.
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