ECONOMICS OF ADVERTISING
Lester G. Telser
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____________________