产业组织理论授课课件-IO-slides-advertising

AdvertisingBasicsProvidedbysomeonewithadefiniteagenda,butnotnecessarilytheproduceroftheproduct.Providedfree--youdonotpaydirectlyfortheadvertising.Notfreetothefirms,sotheremustbesomebenefittothem--increasedprofit.Ingeneral,industrieswithhighestlevelsofadvertisingalsoconsumergoodindustrieswithhighestprofits.AdvertisingBasicsProvidedby1AdvertisingasProductDifferentiationAdvertisingasawasteful,rent-seekingbehavior.Onceproductsaredifferentiatedintheeyesoftheconsumer,thefirmsgainmarketpower.Classicmonopolisticallycompetitivemodel.Pricewillriseabovemarginalcost.Therewillbedeadweightloss.AdvertisingasProductDiffere2MonopolisticCompetitionMonopolisticCompetition3AdvertisingasabarriertoentryIfanindustryischaracterizedbyahighlevelofadvertising,potentialentrantsmustinvestheavilyinadvertisingto“launch”newproducts.Fixedcostsofentryincrease,increasingscaleatwhichfirmmustcompeteinordertobecomeprofitable.Maydecreasethenumberoffirmsinanindustry,thusincreasingprice.Advertisingasabarriertoen4Advertisingaspartofa“prisoner’sdilemma”Advertisingaspartofa“pris5ModelofAdvertisingasa“CapturetheConsumer”GameConsumersknowaboutaproductcategoryingeneral,butarenotwellinformedaboutthecharacteristicsofindividualproducts.Example:don’tknowwhereallthegrocerystoresinWilliamsburgarelocated.Firmsadvertisetoinformconsumers,butonlysomeconsumers“hear”theadvertisements.ModelofAdvertisingasa“Cap6“CapturetheConsumer”GameCon’tAssumetwofirms,XandY.Probabilitythatanycustomerhearsanadvertisementfromfirmiisi.Thus(x*(1-y))consumersknowaboutX,(y*(1-x))knowaboutY,xyareperfectlyinformed,(1-x)(1-y)areuninformed.“CapturetheConsumer”GameCo7“CapturetheConsumer”GameCon’tFirmonlycompetesonpriceforperfectlyinformedconsumers,sopriceishigherthanitwouldbeifallfirmswereperfectlyinformed.Asfirmstrytoreachmoreconsumers,theymustspendmoremoneyonadvertising(diminishingreturnstoadvertising).Higherpriceinpartfundsadvertising.“CapturetheConsumer”GameCo8PositiveViewsonAdvertisingAdvertisingcanbea“good”itselfwithapositivevaluetoconsumers.Advertisingcanprovideinformationandloweraconsumer’ssearchcosts.Instateswithrestrictionsonpriceadvertising(prescriptiondrugs,alcohol)pricesaregenerallyhigher.Advertisingcansignalquality. PositiveViewsonAdvertisingA9AdvertisingasaComplementtoMonopolyPowerAdvertisingcanhelpincreasethevalueofagood.Advertisingisacomplementtoprimarygood;consumersvaluejointconsumptionoftheprimarygoodandthead.Firmsadvertisetoincreasethedemandfortheprimarygood.Thistheoryappliestoabroadrangeofgoods.AdvertisingasaComplementto10ModelofAdvertisingandCrowdAppealTotalofNconsumersinthemarket.Eachconsumerwillbuyonlyoneunitoftheprimarygood.Eachconsumerhasadifferentvalue,vi,fortheprimarygood.Advertisingincreaseseachconsumer’svaluebythesamefactor,,regardlessoftheirinitialvalue.Thuseachconsumer’svaluewithadvertisingis*vi.ModelofAdvertisingandCrowd11ModelofAdvertisingandCrowdAppeal$QuantityMCDemandwithoutadvertisingProfit*DemandwithadvertisingModelofAdvertisingandCrowd12ModelofAdvertisingandCrowdAppeal,con’tIncreaseinconsumers’willingnesstopay,,isafunctionoftheamountspendonadvertising,s.

Assincreases,(s)increases,asdoesconsumerdemandandprofit.Firmswillselectthelevelofadvertisingthatmaximizesprofit,i.e.,thelevelofswherethemarginalrevenuefromsisequaltothemarginalcostofs.ModelofAdvertisingandCrowd13ModelofAdvertisingandCrowdAppeal,con’tInthismodel,higherlevelsofadvertisingleadtohigherpricesbecausetheadvertisingincreasestheconsumers’willingnesstopay.Also,advertisingcanincreaseconsumersurplusaswellasfirmprofit,sinceadvertisingincreasesaconsumer’svalue.ModelofAdvertisingandCrowd14ModelofAdvertisingasInformationTotalofNidenticalconsumersinthemarket.Eachconsumerwillbuyq(P)ifinformedabouttheproduct.Advertisinginformsconsumersabouttheexistenceand/orusefulnessoftheproduct.Numberofconsumersinformeddependsontheamountspentonadvertising.ModelofAdvertisingasInform15ModelofAdvertisingasInformation$QuantityMCDemandwithlowadvertisingProfitDemandwithhighadvertisingModelofAdvertisingasInform16ModelofAdvertisingasInformation,con’tAssincreases,sodoesdemandandprofit.Firmsselectadvertisingtomaximizeprofit,i.e.,swhereMRfromsisequaltotheMCofs.Inthismodel,higherlevelsofadvertisingdonotleadtohigherprices.Advertisingdoesincreaseconsumersurplusaswellasfirmprofit,sinceadvertisingincreasesthenumberofconsumersthatgetasurplus.ModelofAdvertisingasInform17ComparisonofthesetwomodelsComplementaryGoodsModel:Higheradvertisingleadstohigherdemandforeachconsumer,whichleadstohigherprices.BrandRecognitionModel:Higherlevelsofadvertisingleadstomoreconsumersbutnotahigherdemandforeachconsumer,sopricesarenotaffectedbyadvertisinglevels.Comparisonofthesetwomodels18MoreAbouttheOptimalLevelofAdvertisingUsetheAdvertisingasInformationmodel.Assumeaninformedconsumerhasademandofq=a-bP.Thenumberofinformedconsumersdependsonthelevelofadvertising,s.TotaldemandQ=n(s)(a-bP).Assumethatthefirmhasaconstantmarginalcostofproductionofcandaconstantmarginalcostofadvertising,.MoreAbouttheOptimalLevelo19MoreAbouttheOptimalLevelofAdvertising,con’tIftotaldemandQ=n(s)(a-bP),thentheinversedemandisP=a/b-Q/[b*n(s)]whichwecanrewriteasP=A-BQ/n(s).Profitsare=(A-BQ/n(s)-c)Q-s.FirstfindQ*givensbytakingthederivativeofprofitw.r.t.Qandset=0.A-2BQ/n(s)-c=0Q*=(A-c)*n(s)/2B.SoP*=A-B[(A-c)*n(s)/2B]/n(s)=(A+c)/2.MoreAbouttheOptimalLevelo20MoreAbouttheOptimalLevelofAdvertising,con’tAssumethefirmincreasessbyoneunit.Whathappenstoprofit?Quantitysoldwillincreasesince Q*=(A-c)*n(s)/2B.CallthisamountQs.P*isindependentofs,sofortheadditionalunitssold,firmgets(P*-c).SoMRfromonemoreunitofsisQs(P*-c).Thefirmwilladvertiseuntil=Qs(P*-c).

MoreAbouttheOptimalLevelo21MoreAbouttheOptimalLevelofAdvertising,con’tRememberfromthelectureonpricediscriminationthattheprice-costmarginforamonopolistisafunctionofdemandelasticity.(P*-c)/P*=1/(Lernerindex)Usethiswiththeconditionfortheoptimalamountofs:=Qs(P*-c).

Rearrangetoget:=Qs(P*/)MoreAbouttheOptimalLevelo22MoreAbouttheOptimalLevelofAdvertising,con’tSonowwehave=Qs(P*/)/P*=Qs/.Multiplybothsidesbys*/Q*toget: s*/P*Q*=s*Qs/Q*.Thel.h.s.isjustadvertisingexpenditures/salesrevenue(adv.tosalesratio).Ther.h.s.canbebrokendownintotwoparts:s*Qs/Q*and.Thefirstistheelasticityofdemandw.r.t.adv.andthesecondispriceelasticity.MoreAbouttheOptimalLevelo23MoreAbouttheOptimalLevelofAdvertising,con’tSotheoptimaladvertisingtosalesratioshouldbethesameastheratiooftheelasticityofdemandw.r.ttoadvertisingtotheelasticityofdemandw.r.t.price.ThisisknownastheDorfman-Steinercondition.Themorepriceinelasticdemandis,themoreshouldbespentonadvertising.

Themoreadvertisingelasticdemandis,themoreshouldbespentonadvertising.MoreAbouttheOptimalLevelo24MoreAbouttheOptimalLevelofAdvertising,con’tNote:criticsoftenarguethatadvertisingmakesconsumersmorebrandloyal,i.e.makesdemandinelastic.Thisderivationshowsthatthecausationcouldbetheotherwayaround:Becausedemandispriceinelastic,moreadvertisingisoptimal.MoreAbouttheOptimalLevelo25ElasticityofDemandwithrespecttoAdvertising“Shopping”goods:Relativelyexpensiveandinfrequentlypurchased,soyoushoparoundforthem.Cars,computers,furniture.Advertisingrelativelyunimportant,yougatheralotofdataonyourown.“Convenience”goods:Relativelyinexpensiveandfrequentlypurchased.Shampoo,soda,beer.Advertisingrelativelyeffective.ElasticityofDemandwithresp26ElasticityofDemandw.r.t.Advertising,con’tAddinNelson’scategorizationof“Search”vs.“Experience”goods.Search:Qualitycanbeidentifiedbeforepurchase.Consumerssearchforthebesttotalpackageofpriceandquantity.Experience:Qualitycanonlybedeterminedafterconsumption.Consumerstrydifferentgoodstodeterminewhetherornottocontinuetouse.ElasticityofDemandw.r.t.Ad27ElasticityofDemandw.r.t.Advertising,con’tElasticityofDemandw.r.t.Ad28Dorfman-SteinerinActionDorfman-SteinerinAction29AdvertisingandSignalingForexperiencegoods,advertisingcanalsobeusedtosignalquality.Ifacompanyengagesinanexpensiveadcampaign,youmightinferthatthegoodishighqualitybecauseonlyhighqualityfirmscouldaffordthecampaign.Priceiscanalsobeusedasasignalofhighquality.AdvertisingandSignalingFore30FreeRiderProbleminAdvertisingAdvertisingcanhavepositiveexternalitiesforotherfirmsinanindustry.Withpositiveexternalities,therewillbetoolittleadvertisingduetofree-riders.Thuswemightsuspectthatinindustrieswithlargenumbersoffirms(andthuslargepositiveexternalities)advertisinglevelswouldberelativelylow.Supportedbyabout1/2ofstudies.FreeRiderProbleminAdvertis31FreeRiderProblemcon’tOnesolutionisgrouporcooperativeadvertising.GotMilk?Campaign.Plasticscouncil.McDonald’s.FreeRiderProblemcon’tOneso32AdvertisingBasicsProvidedbysomeonewithadefiniteagenda,butnotnecessarilytheproduceroftheproduct.Providedfree--youdonotpaydirectlyfortheadvertising.Notfreetothefirms,sotheremustbesomebenefittothem--increasedprofit.Ingeneral,industrieswithhighestlevelsofadvertisingalsoconsumergoodindustrieswithhighestprofits.AdvertisingBasicsProvidedby33AdvertisingasProductDifferentiationAdvertisingasawasteful,rent-seekingbehavior.Onceproductsaredifferentiatedintheeyesoftheconsumer,thefirmsgainmarketpower.Classicmonopolisticallycompetitivemodel.Pricewillriseabovemarginalcost.Therewillbedeadweightloss.AdvertisingasProductDiffere34MonopolisticCompetitionMonopolisticCompetition35AdvertisingasabarriertoentryIfanindustryischaracterizedbyahighlevelofadvertising,potentialentrantsmustinvestheavilyinadvertisingto“launch”newproducts.Fixedcostsofentryincrease,increasingscaleatwhichfirmmustcompeteinordertobecomeprofitable.Maydecreasethenumberoffirmsinanindustry,thusincreasingprice.Advertisingasabarriertoen36Advertisingaspartofa“prisoner’sdilemma”Advertisingaspartofa“pris37ModelofAdvertisingasa“CapturetheConsumer”GameConsumersknowaboutaproductcategoryingeneral,butarenotwellinformedaboutthecharacteristicsofindividualproducts.Example:don’tknowwhereallthegrocerystoresinWilliamsburgarelocated.Firmsadvertisetoinformconsumers,butonlysomeconsumers“hear”theadvertisements.ModelofAdvertisingasa“Cap38“CapturetheConsumer”GameCon’tAssumetwofirms,XandY.Probabilitythatanycustomerhearsanadvertisementfromfirmiisi.Thus(x*(1-y))consumersknowaboutX,(y*(1-x))knowaboutY,xyareperfectlyinformed,(1-x)(1-y)areuninformed.“CapturetheConsumer”GameCo39“CapturetheConsumer”GameCon’tFirmonlycompetesonpriceforperfectlyinformedconsumers,sopriceishigherthanitwouldbeifallfirmswereperfectlyinformed.Asfirmstrytoreachmoreconsumers,theymustspendmoremoneyonadvertising(diminishingreturnstoadvertising).Higherpriceinpartfundsadvertising.“CapturetheConsumer”GameCo40PositiveViewsonAdvertisingAdvertisingcanbea“good”itselfwithapositivevaluetoconsumers.Advertisingcanprovideinformationandloweraconsumer’ssearchcosts.Instateswithrestrictionsonpriceadvertising(prescriptiondrugs,alcohol)pricesaregenerallyhigher.Advertisingcansignalquality. PositiveViewsonAdvertisingA41AdvertisingasaComplementtoMonopolyPowerAdvertisingcanhelpincreasethevalueofagood.Advertisingisacomplementtoprimarygood;consumersvaluejointconsumptionoftheprimarygoodandthead.Firmsadvertisetoincreasethedemandfortheprimarygood.Thistheoryappliestoabroadrangeofgoods.AdvertisingasaComplementto42ModelofAdvertisingandCrowdAppealTotalofNconsumersinthemarket.Eachconsumerwillbuyonlyoneunitoftheprimarygood.Eachconsumerhasadifferentvalue,vi,fortheprimarygood.Advertisingincreaseseachconsumer’svaluebythesamefactor,,regardlessoftheirinitialvalue.Thuseachconsumer’svaluewithadvertisingis*vi.ModelofAdvertisingandCrowd43ModelofAdvertisingandCrowdAppeal$QuantityMCDemandwithoutadvertisingProfit*DemandwithadvertisingModelofAdvertisingandCrowd44ModelofAdvertisingandCrowdAppeal,con’tIncreaseinconsumers’willingnesstopay,,isafunctionoftheamountspendonadvertising,s.

Assincreases,(s)increases,asdoesconsumerdemandandprofit.Firmswillselectthelevelofadvertisingthatmaximizesprofit,i.e.,thelevelofswherethemarginalrevenuefromsisequaltothemarginalcostofs.ModelofAdvertisingandCrowd45ModelofAdvertisingandCrowdAppeal,con’tInthismodel,higherlevelsofadvertisingleadtohigherpricesbecausetheadvertisingincreasestheconsumers’willingnesstopay.Also,advertisingcanincreaseconsumersurplusaswellasfirmprofit,sinceadvertisingincreasesaconsumer’svalue.ModelofAdvertisingandCrowd46ModelofAdvertisingasInformationTotalofNidenticalconsumersinthemarket.Eachconsumerwillbuyq(P)ifinformedabouttheproduct.Advertisinginformsconsumersabouttheexistenceand/orusefulnessoftheproduct.Numberofconsumersinformeddependsontheamountspentonadvertising.ModelofAdvertisingasInform47ModelofAdvertisingasInformation$QuantityMCDemandwithlowadvertisingProfitDemandwithhighadvertisingModelofAdvertisingasInform48ModelofAdvertisingasInformation,con’tAssincreases,sodoesdemandandprofit.Firmsselectadvertisingtomaximizeprofit,i.e.,swhereMRfromsisequaltotheMCofs.Inthismodel,higherlevelsofadvertisingdonotleadtohigherprices.Advertisingdoesincreaseconsumersurplusaswellasfirmprofit,sinceadvertisingincreasesthenumberofconsumersthatgetasurplus.ModelofAdvertisingasInform49ComparisonofthesetwomodelsComplementaryGoodsModel:Higheradvertisingleadstohigherdemandforeachconsumer,whichleadstohigherprices.BrandRecognitionModel:Higherlevelsofadvertisingleadstomoreconsumersbutnotahigherdemandforeachconsumer,sopricesarenotaffectedbyadvertisinglevels.Comparisonofthesetwomodels50MoreAbouttheOptimalLevelofAdvertisingUsetheAdvertisingasInformationmodel.Assumeaninformedconsumerhasademandofq=a-bP.Thenumberofinformedconsumersdependsonthelevelofadvertising,s.TotaldemandQ=n(s)(a-bP).Assumethatthefirmhasaconstantmarginalcostofproductionofcandaconstantmarginalcostofadvertising,.MoreAbouttheOptimalLevelo51MoreAbouttheOptimalLevelofAdvertising,con’tIftotaldemandQ=n(s)(a-bP),thentheinversedemandisP=a/b-Q/[b*n(s)]whichwecanrewriteasP=A-BQ/n(s).Profitsare=(A-BQ/n(s)-c)Q-s.FirstfindQ*givensbytakingthederivativeofprofitw.r.t.Qandset=0.A-2BQ/n(s)-c=0Q*=(A-c)*n(s)/2B.SoP*=A-B[(A-c)*n(s)/2B]/n(s)=(A+c)/2.MoreAbouttheOptimalLevelo52MoreAbouttheOptimalLevelofAdvertising,con’tAssumethefirmincreasessbyoneunit.Whathappenstoprofit?Quantitysoldwillincreasesince Q*=(A-c)*n(s)/2B.CallthisamountQs.P*isindependentofs,sofortheadditionalunitssold,firmgets(P*-c).SoMRfromonemoreunitofsisQs(P*-c).Thefirmwilladvertiseuntil=Qs(P*-c).

MoreAbouttheOptimalLevelo53MoreAbouttheOptimalLevelofAdvertising,con’tRememberfromthelectureonpricediscriminationthattheprice-costmarginforamonopolistisafunctionofdemandelasticity.(P*-c)/P*=1/(Lernerindex)Usethiswiththeconditionfortheoptimalamountofs:=Qs(P*-c).

Rearrangetoget:=Qs(P*/)MoreAbouttheOptimalLevelo54MoreAbouttheOptimalLevelofAdvertising,con’tSonowwehave=Qs(P*/)/P*=Qs/.Multiplybothsidesbys*/Q*toget: s*/P*Q*=s*Qs/Q*.Thel.h.s.isjustadvertisingexpenditures/salesrevenue(adv.tosalesratio).Ther.h.s.canbebrokendownintotwoparts:s*Qs/Q*and.Thefirstistheelasticityofdemandw.r.t.adv.andthesecondispriceelasticity.MoreAbouttheOptimalLevelo55MoreAbouttheOptimalLevelofAdvertising,con’tSotheoptimaladvertisingtosalesratioshouldbethesameastheratiooftheelasticityofdemandw.r.ttoadvertisingtotheelasticityofdemandw.r.t.price.ThisisknownastheDorfman-Steinercondition.Themorepriceinelasticdemandis,themoreshouldbespentonadvertising.

Themoreadvertisingelasticdemandis,themoreshouldbespentonadvertising.MoreAbouttheOptimalLevelo56MoreAbouttheOptimalLevelofAdvertising,con’tNote:criticsoftenarguethatadvertisingmakesconsumersmorebrandloyal,i.e.makesdemandinelastic.