Issues in Advertising: The Economics of Persuasion

By David G. Tuerck | Go to book overview

TOWARDS A THEORY OF THE
ECONOMICS OF ADVERTISING

Lester G. Telser


Introduction

Advertising remains a challenging problem for economic theory for several reasons. First, the ordinary assumption that tastes are given does not serve us well for advertised products. We are forced to pay attention to the effects of what people know about products that they buy. The simplifying assumption of elementary economic theory focuses attention on price alone for commodities of known virtues or vices. To understand advertising we must reckon with the fact that a person's stock of knowledge about goods and services influences his preferences. It is, therefore, useful to assume given tastes only if the stock of knowledge is given. Under these circumstances, when the stock of knowledge changes, the theory that takes this into account will furnish better predictions of behavior.

Second, although advertising is a joint product that goes together with some physical good or service, it is not literally tied to the good or service. To illustrate, buttons and coats are normally tied together to make a joint product. Since different coats are made with different numbers of buttons, one can calculate a derived demand for buttons and a derived demand for coats separately. In these respects alone there is no substantial difference between advertising and coat buttons. The distinction lies in this. When someone buys a coat he pays for both the coat and the buttons. With advertising this is not generally true. There are people who may receive the benefits of advertising messages without facing the burden of paying for the advertising. There are also people who pay for the advertising when they buy the advertised good or service who do not necessarily benefit from the advertising because whatever information it contains is redundant to these buyers. This, however, begs the question of why they do not buy some equivalent good or service that is not advertised at all or is less advertised and in

____________________
I wish to thank Yale Brozen, Milton Friedman, Harry Johnson, Sam Peltzman, and George Stigler for their helpful comments on an earlier draft of this paper. I assume responsibility for all errors herein.

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Issues in Advertising: The Economics of Persuasion
Table of contents

Table of contents

  • Title Page iii
  • Major Contributors v
  • Contents ix
  • Introduction 1
  • Acknowledgments 11
  • Part One Issues in Regulation 13
  • Advertising and Legal Theory 15
  • Advertising Regulation and the Consumer Movement 27
  • Commentaries 45
  • Part Two Advertising and the Firm 69
  • Towards a Theory of the Economics of Advertising 71
  • Introduction 71
  • Optimal Advertising: An Intra-Industry Approach 91
  • Conclusion 111
  • Technical Appendix 112
  • Commentaries 115
  • Part Three Advertising as Information 131
  • Advertising as Information Once More 133
  • Appendix A: Derivation of the Relationship Between a and P 156
  • Appendix B: Data Sources 158
  • Advertising, Information, and Product Differentiation 184
  • Commentaries 193
  • Four Part Advertising, Concentration, and Profits 215
  • Advertising Intensity and Industrial Concentration- an Empirical Inquiry, 1947-1967 217
  • Conclusions 249
  • Advertising and Oligopoly: Correlations in Search of Understanding 253
  • Appendix A 262
  • Appendix B 263
  • Commentaries 267
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