Advertising (2)

How much advertising? Suppose there is no advertising. Quantity Dollars AD $ Dollars Demand MR MC Q1 Why advertise? MRA > MCA That is, advertising will increase demand. At Eq’m level E, we will be at the optimal level of advertising, output, and profits 1 0 MCA MRA MR’ QE Demand’

Is advertising ethical? Why? –It provides useful information. –It provides competition. Why not? –People in the professions shouldn’t advertise. –Consumers may not interpret advertising appropriately.

Who advertises? Rizzo found: –Members of larger groups. –Foreign medical graduates –Female practitioners WHY?

Impacts Information Better information –provides more competition. –makes demand more elastic. This should lower prices. Hence, advertising is beneficial. Barrier to Entry Creates brand loyalty –provides less competition. –makes demand less elastic. This may raise prices. Hence, advertising is harmful.

Advertising as Information Black demand means advertising prohibited. Red demand means advertising permitted. Information makes demand more elastic, more competition. Price falls. Q $ D1 MR1 MC Q1 D2 MR2 Q2 P1 P2

Advertising as Barrier to Entry Black demand means advertising prohibited. Red demand means advertising permitted. Advertising makes demand less elastic, less competition. Price rises. Q $ D2 MR2 MC Q2 D1 MR1 Q1 P2 P1

Advertising and Health Lots of work on impact of ads on smoking and drinking. Tobacco firms argue(d) that they don’t start people smoking. They just get them to change. Prof. Hamilton of our faculty did a classic study looking at the cigarette advertising ban. –On the one hand, advertising was stopped. –On the other hand, anti-cigarette advertising was also stopped. –Basically, they seemed to cancel each other out. Generally speaking, some modest effects on cigarette consumption.

Lots of work on tax impacts Equilibrium price and quantity. Per pack excise tax. What happens to consumption. Q P D S Tax P1 Q1 S+T Well, it depends. On the elasticity of demand. Q2 P2

What do we know about elasticities? In the long run, demand is more elastic, so it may fall more. Apparently youth demand may be some more elastic, and the decision to start may be impacted.