Electronic Commerce Advertising, Signaling and Product Information

Signals and product information More advertisement, lower searching cost (Stigler ’ s argument) Matching the demand and the supply For experienced goods, more advertisement means higher quality (Nelsen effect) A firm afforded the large amount of advertising will safeguard the product quality for the future/continuous transactions to recover the priori investment. (credible commitments) For searching goods, higher price means higher quality (Schumalensee effect) The compensation for investment of quality improvement Continuous advertisement (Leffler effect) Maintain the incumbent ’ s reputation and entry deterrence

Economic roles of advertising  To inform customers  To increase demands  To change the elasticity of demand  To deter the entrants  To differentiate from competitors Informative purpose Persuasive purpose Competitive purpose

Drivers of Increasing Internet Advertising Extended product endorsements and reviews from customers (a source of persuasive information) Instant cross-linkage between advertisement and web purchasing Advertising solicits more searching product lists Automatic update of product lists

Performance of Internet Advertising High success rate of targeting High-tech & High-touch Low Internet penetration rate Insufficient coverage of sampling frame for exhaustive targeting TV & newspaper still dominated Extending by network convergence Increasing mobility & interactivity (3G ’ s intimacy) Higher advertising cost per user Integrating advertising channels

Types of Internet advertisement Banner ads ads (junk s) Web storefront (URL linkage) Pop-up ads (annoying but effective) Subscription-based advertisement (coupon & discounted privilege)

Increase demand

Change the demand elasticity Create differentiated image and raise the price higher to extract more surplus without losing many sales Create the necessity and instant consumption to lower the price down for expanding market share

Information about information products Truth of product information won ’ t be verified until information had been revealed thoroughly. However, the price of information probably failed after public information acknowledgement. A secret algorithm but a convincible signal Zero-knowledge proof: a signal providing a complete and perfect information about the quality without revealing the intrinsic information/secrets of product

Proxy signals of actual quality Demonstration The black box approach Past performance Educational level, career experience Benchmark (key players in the market)

The effect of advertising on price Absolute price Informative purpose: lower down searching cost and facilitate comparison, lower prices Persuasive purpose: ensure quality and raise prices higher Price dispersion More informed customers: lower price dispersion (on the Internet) Higher searching cost: higher price dispersion Market efficiency Price higher than before: advertising costs are more than the saved searching cost Price lower than before: advertising costs are more than the saved searching cost

The effect of Advertising on the product differentiation Vertical differentiation: quality differences Horizontal differentiation: feature differences Advertising enhances the degree of differentiation (especially, in the horizontal dimension) More informed customers: high price means high quality (searching goods) For experienced goods: persuasive purpose and the possibility of trying out

Internet advertising Renting reputation: leveraged and allied with reputable firms to conglomerate in the web portal Shareware and wasted investment Quality guarantee and refundable Aggregate insurance among complementors Trust within community Average fraud rate (very low fraud rate on the eBay)

Effective online advertising Visually appealing Targeting customers Valuable contents Brand name matters Linking to the overall marketing strategy Combination between push and pull manners Interactive marketing Commoditization of advertisements as a new Internet business (electronic intermediaries, e.g., 24/7 realmedia.com, doubleclick.com)