Economics of Economics of AdvertisingAdvertising

Abe Wapner, Maclain Riccardi, Bradlee Palmquist, Alexandra Harenberg, Jimmy Carragher

AdvertisingAdvertising

• Informative Advertising

• Persuasive Advertising

2 Types of Advertising 2 Types of Advertising

(that we will discuss)(that we will discuss)

-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

Persuasive advertising follows the Persuasive advertising follows the

four P's of Marketingfour 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 How the Auto Industry Uses Informative Advertising: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 AdvertisingBillboard 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)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 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

Butters ModelButters 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 AdvertisingSearch 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 WorksHow Search Advertising Works

• Targeted to match specific Keywordso Appealing to Advertisers

• Customers often use search engines to find and compare items for purchaseo Provides advertisers the opportunity to target these customers

looking for specific products

• Non-Advertising results called Organic Results

By Jacob Hansen

•

PersonalizationPersonalization

• 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?How Are Ad Positions Determined?

• With the use of Ad Auctionso The system search engines use when pricing and determining the

positions of ads amongst advertisers

Ad Quality is a measure of the ads relevance.

PricingPricing

ExampleExample

Amount determined by:Price: $4 vs. 6 vs. 5Ad Quality: 0.04 vs. 0.02 vs. 0.01And then Price-per-click

•

Conclusion of Pricing and PositionConclusion of Pricing and Position

1. Advertisers submit keywords and bids to Google2. User searches, Google compiles matching ads to

that search3. List of ads ordered based on bids and ad quality,

measuring relevance to the user4. 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 ImportantWhy 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 Means End Theory and Leverage

PointsPointsMeans 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 Persuasive advertising affects

customer choicecustomer 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 Persuasive advertising singles out

particular products as bestparticular 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 Bo Opportunity Cost

Persuasive advertising markets to Persuasive advertising markets to

particular groupsparticular 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 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 How Does Advertising Affect the

Economy?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 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.

AppleApple

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.