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Economics of
Advertising
Abe Wapner, Maclain Riccardi, Bradlee Palmquist,
Alexandra Harenberg, Jimmy Carragher
Advertising
-Is a form of communication used to promote a
business with the goal of attracting potential
consumers.
-Can have an impact on the economics of the firm itself,
for better or for worse
2 Types of Advertising
(that we will discuss)
•
•
Informative Advertising
Persuasive Advertising
Persuasive advertising follows the
four P's of Marketing
•
Price
•
Product
•
Placement
•
Promotion
Informative Advertising
• A promotional effort at generating interest in a good,
service, or organization by providing consumers with
information.
• Often used to generate a good reputation for the
business running the ads, or correct any mistaken
impressions
• Create a brand image for the company.
• Allows the potential customer to feel in control to make
their own informed decisions.
• Types of advertising: mobile, email spam, digital
signage, online display advertising, and unpaid
advertising.
Includes:
Billboard Advertising
Butters Model
Diamond's Paradox
•
•
•
How the Auto Industry Uses Informative
Advertising:
Car companies like Honda often create
commercials that talk in detail about the safety
features of their vehicles. Doing so may entice
potential customers and allow them to make an
informed decision when buying a car. If the
advertising campaign is successful, this could
increase the demand for Honda's vehicles.
•
•
•
•
Billboard Advertising
One of the simplest models of informative
advertising in that supply is a function of open land
and demand is derived from the demand for the
product the advertisers are selling
The economics of how roadside billboards are used
to inform the public
When the supply of billboards is higher, the greater
the informative advertising there is.
Comes in a variety of forms, including mobile
billboards
Diamond's Paradox (1971)
Steps:
1) Consumer assigns his value (V)
2) Consumer chooses whether to go to this store
*this increases search cost (cost of
travel time)
3) Firm chooses its price (P)
4) Consumer chooses whether or not to buy the
product
(search costs are now sunk costs)
*the consumer will buy if V>P BUT V=P because once the
consumer is at the store, price is observed.
Paradox: Consumer would never go to the store,
because including sunk costs, price is always greater
than value.
Butters Model
Say there are a whole bunch of mailboxes.
Let s = # of mailboxes.
Everyone has his or her own mailbox.
Now, I am going to send out advertisements in the form
of letters, which will go into some random mailboxes.
Let m = # of letters that I send out.
What is the probability
that someone sees my
letter?
Butters Model
Butters Model
As m increases, you are more
likely to see my letter!
The probability of seeing a letter
is function of the number of
letters that I send out.
Search Advertising
A form of Internet Marketing,
Search Advertising is the method of placing ads on
websites that show results from search engine
queries.
Ads are paid announcements of goods or sales often
in newspapers, magazines, on the radio or
television, online, etc.
How Search Advertising Works
•
Targeted to match specific Keywords
o
•
Customers often use search engines to find and
compare items for purchase
o
•
Appealing to Advertisers
Provides advertisers the opportunity to target these customers looking
for specific products
Non-Advertising results called Organic Results
By Jacob Hansen
Personalization
•
The more information an engine has about a
person, the better the customized search results,
recommendations, and ads.
o
•
Example: Amazon, location results (ie: nearest restaurants)
Demographics are important
The Supply and Demand of Keywords
How Are Ad Positions Determined?
•
With the use of Ad Auctions
o
The system search engines use when pricing and determining the
positions of ads amongst advertisers
Ad Quality is a measure of the ads relevance.
Pricing
Example
Amount determined by:
Price: $4 vs. 6 vs. 5
Ad Quality: 0.04 vs. 0.02 vs. 0.01
And then Price-per-click
Conclusion of Pricing and Position
1. Advertisers submit keywords and bids to Google
2. User searches, Google compiles matching ads to
that search
3. List of ads ordered based on bids and ad quality,
measuring relevance to the user
4. Highest ranked ad displayed in top position,
second highest ad gets second, etc.
5. If users click on an ad, the advertiser is charged a
price depending on rank.
Why It's Important
•
•
Traditionally focused on making money as
opposed to those that interest users
Paid Search Advertising represents 4% of US
expenditures and nearly 1/3 of online Advertising
Means End Theory and Leverage
Points
Means End Theory
an advertisement should have a message or
meaning that the consumers will intake and affect
whether or not they will make the purchase.
Leverage Points
strategy where the advertiser will try to help the
consumer realize the benefits of the product and
apply these strategies to benefit themselves.
•
•
Persuasive advertising affects
customer choice
•
•
Seeks to entice consumers into purchasing specific
goods or services
Appeals to consumers' emotions and general
sensibilities
•
Conveys the perception that the consumer will
experience benefits similar to what is portrayed
in the advertisement
Persuasive advertising singles out
particular products as best
•
•
•
Assumes that the consumer already understands
the basic nature of the product
Convinces consumer of the benefits that set a
particular product apart from the competition
Marginal benefit of product A > Marginal benefit of
product B
o
Opportunity Cost
Persuasive advertising markets to
particular groups
•
•
•
Targets particular demographics through niche
marketing
Tailors ads to be most effective for a particular
group
Places ads in locations where target demographic
will most likely encounter them
Negative Aspects of Advertising
•
•
•
•
Advertising such as billboards spoil the aesthetic
value of the countryside
Commercials on television are extremely annoying
for viewers.
As stated earlier, the addition of DVR allows
customers to skip through the advertisements on
television, where in the end, the ads are not
contributing to anything.
Advertisements annoy people.
How Does Advertising Affect the
Economy?
•
•
•
•
•
Makes jobs
Reduces selling costs
Increases company profits
Increases company security
Speeds up consumption.
Demand for products
Demand for advertising
Leads to demand for jobs
...Advertising
has had a
positive effect
on
unemployment.
•
•
•
Advertising can help turn a small firm into a huge
company and goods or services can be
transformed into mass-market consumptions.
Companies are able to reduce their selling costs
and increase the margin and profits from their
products!
The increase in advertising has led to an increase in
consumers' needs to buy new products and use
new services.
Apple
Successful advertising can increase a
company's security as it develops a brand
that can be trusted.
Example: Apple
• Most recently, Apple has focused on
television advertising, most notably with its
Mac vs. PC ads.
• People want Apple products, therefore,
Apple makes a lot of money.
• Apple is all about technology and being
modern.
o Apple keeps its customers hooked on its
products.
Apple
Through its development in
technology and advertising,
Apple remains a top company
and its products are highly
demanded --> consumers keep
spending money --> causes the
economy to bring in more
money --> helps the recession.