The Economics of Advertising

Anthony J. Pennings, PhD

New York University

3 Roles of Advertising

• Persuasive

• Informative

• Complementary

• Informative?

What is Advertising?

Advertising informs the perception of goods and services to influence consumers and to reassure investors as well as distributors and retailers

Advertising Industry Structure

• Advertising traditionally has been dominated by four major conglomerate holding companies:– Omnicom and Interpublic of New York– WPP of London– Publicis of Paris

• These advertising groups account for some 250,000 employees and own subsidiaries spread among many countries throughout the world

Advertising Industry Structure

• Google quickly became a powerhouse in the advertising field reaching revenues of over US$20 billion by 2010

Why Advertise?

Advertising is best seen within a context of competing against other companies with similar goods or services for sale. It is useful for companies that may want to increase competitive advantage in a crowded market

Why Advertise?

The more competition in an environment, the more the need to advertise?

O – market structure

John Kenneth Galbraith

• As a famous economist on modern industrial society Galbraith pointed out the two major reasons for advertising:– Manipulate market demand– Guard against sudden shifts in demand

MySpace vs. Facebook

Advertising or technological innovation?

Why Advertise

Determine what brands rather than what products people will buy

Why Advertise?

Differentiate a product

Draw attention to brands

Why Advertise?

Brands as “symbolic thirds”?

Why Advertise?

• As a barrier to entry to gain competitive advantage

• Impose high start-up costs on new entrants

• Especially in a digital environment?– No natural economies of scale to ward off

competitors

Why Advertise?

• Brand proliferation• Pepsi One, Coke Zero