Slide 1

AEM 4550: Economics of Advertising Prof. Jura Liaukonyte LECTURE 3: ADVERTISING ELASTICIES

Slide 2

Plan of the Lecture Economics of Superbowl advertising Other Elasticities Advertising Elasticity Measures of Market Concentration Relationship between Advertising and Market structure: Dorfman-Steiner Condition Optimal Advertising levels Advertising to sales ratios across different industries Product differentiation and Advertising

Slide 3

Poll Everywhere At the beginning of each lecture you will be presented with a keyword. Todays keyword is RABBIT To sign-in for the day, text: Keyword netID to 37607 dont forget the space between the keyword and netID Keyword is not case sensitive. Or, you can sign in via a web browser at PollEv.com/dyson:PollEv.com/dyson Just enter your netid For today: Text to 37607: RABBIT jl2545 Go online to: PollEv.com/dyson jl2545 or

Slide 4

Super Bowl Ads The 21 most-watched television programs in American history are all Super Bowls Super Bowl 2015 delivered its highest overnight TV rating ever 111.5MM viewers in 2014 114.5MM viewers in 2015 Cost of exposure in 2015, $4.5 million for a 30-second spot Average CPM on TV for 2015 = $37.35. CPM Cost per Mille - price an advertiser pays to reach a thousand viewers Calculate CPM for a 2015 Superbowl ad = 4.5*1000/114.5 = $39.3

Slide 5

Slide 6

Slide 7

Slide 8

Price Elasticity of Supply Measures the sensitivity of quantity supplied given a change in price Measures the percentage change in quantity supplied resulting from a 1 percent change in price

Slide 9

Income Elasticity of Demand Measures how much quantity demanded changes with a change in income DefinitionFormula Sign indicates normal or inferior E I >0 implies normal good. E I

Size of shift in Demand E XY >1 E XY

HHI The Herfindahl-Hirschman Index the square of the percentage market share of each firm summed over the largest 50 firms in the industry (or all of the firms if there is less than 50) Definition Properties Example In perfect competition, the HHI is small In monopoly, the HHI is 10,000 (100 squared) A popular measure with the Justice Dept in the 1980s HHI < 1000 characterized competitive markets HHI > 1800 would bring Justice Dept challenge to proposed mergers E.g. The cigarette industry is highly concentrated with only 8 firms and a Herfindahl-Hirschman Index (HH1) of 2623

Slide 38

Example: Candy and Chocolate Industry

Slide 39

Candy v. Chocolate HHI (for top 4)= 2941.81 Cr = 78.1% High level of concentration HHI (for top 4) = 1141 CR = 59% Medium level concentration ->Concentration is increasing! CANDY CHOCOLATE 518 Businesses overall!! 1,039 businesses overall !!

Slide 40

CR and HHI: Candy Industry The HHI for just the top 4 companies in the industry is 2941.81. The CR for the industry is 78.1%. Therefore, the industry is highly concentrated with only a few major firms holding a majority of the market share. CR = 49.5 + 21.6 + 4 + 3= 78.1% *Hershey and Mars Inc. alone hold 71.1% of the market share. -Note that students calculated HHI incorrectly (need to add squared market shares for top 50 companies, not only top 4)

Slide 41

Example: Credit Card Industry

Slide 42

All Credit Lending Institutions with their own card 27.2%J.P. Morgan Chase & Co. 19.2% Bank of America Corporation 18.9% Citigroup Inc. 17.2% American Express Company 4.0% Capital One CR4: 83.2 HHI: 1810-1850 Total Number of Companies: 192 Market Definition

Slide 43

What is a Market? No clear consensus the market for automobiles should we include light trucks; pick-ups SUVs? the market for soft drinks what are the competitors for Coca Cola and Pepsi? With whom do McDonalds and Burger King compete? Presumably define a market by closeness in substitutability of the commodities involved how close is close? how homogeneous do commodities have to be?

Slide 44

Fast-Food Outlets Burger King McDonaldsWendys