ch20 - Chapter 20: Advertising, Market Power, and...

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Unformatted text preview: Chapter 20: Advertising, Market Power, and Information 1 Advertising, Market Power and Information Chapter 20: Advertising, Market Power, and Information 2 Introduction Advertising has played a central role in development of marketing allows manufacturers to reach customers directly with information about their products and prices removes need for specialized sellers providing expertise Modern phenomenon of retailers selling wide array of different products and many versions of the same product owes much to mass media and advertising But important issues remain: Does advertising foster market power/suppress competition? How does advertising work? What information is provided? Is there too much or too little advertising? Chapter 20: Advertising, Market Power, and Information 3 Stylized Facts About Advertising Volume of advertising expenditures is large. For the US, advertising consumes over 2% of gdp Underneath this national total is a wide variety in firm advertising behavior Car makers (e.g., GM) and household product firms (e.g., Proctor & Gamble) spend the most on advertising Some directly in mass media Some indirectly in mailings, catalogs, coupons, etc. Basic patterns that emerge are: Correlation between advertising & market power Consistency of advertising behavior within industriesbig advertisers remain big over time and across countries Chapter 20: Advertising, Market Power, and Information 4 Advertising and Monopoly Power Assume a firm faces a downward-sloping demand inverse curve but one that shifts depending on the amount of advertising (messages) that the firm does Profit maximization requires that marginal revenue = marginal cost c at optimal Q * ( 29 , Q P P = ( 29 ( 29 ( 29 c * Q Q *, Q P *, Q P *, Q MR = + = From Chapter 3, we know that this condition can be expressed in terms of the Lerner Index, LI P * P c * P 1 =- Where P is the price elasticity of demand Chapter 20: Advertising, Market Power, and Information 5 Advertising and Monopoly Power (cont.) Now consider optimal advertising. At any output Q , more advertising will raise the price P ( Q , ) revenue will rise by the price increase times output Q ....
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ch20 - Chapter 20: Advertising, Market Power, and...

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