Issues in Advertising: The Economics of Persuasion

By David G. Tuerck | Go to book overview

OPTIMAL ADVERTISING:
AN INTRA-INDUSTRY APPROACH

Michael E. Porter

Discussion of advertising's roles--as informer, persuader, facilitator of competition, deterrent to competition, villain or savior to the media-- and influence on social values has filled many volumes. In fact, a recent review of the literature on just a few of these roles fills a whole book.1

Despite this attention to the effects of advertising, we have very little in the way of an operational theory of the optimal level of advertising by the firm. Dorfman and Steiner's 1954 paper presented a model of the determination of optimal advertising in a simple world where a monopolist faced a demand curve dependent on price and advertising outlays.2 While this model is logically correct, it is nonoperational since the parameters that underlie the advertising elasticity of demand are unknown. Neither do we know the shape of the advertising cost function. Further, Dorfman and Steiner's model cannot easily be extended to cover advertising competition among firms, which should affect the revenue productivity of individual firm advertising outlays.

Other approaches to the optimal level of advertising of the firm have sought to relate it to various aspects of the firm's environment. A body of literature has developed on the relation between advertising and seller concentration, represented by papers in this conference.3 This literature reflects the view that advertising levels will be affected by the patterns of competition among firms as determined by concentration. Other analyses have proposed that firms' advertising levels are affected by the varying cost of supplying information to differently situated

____________________
1
James M. Ferguson, Advertising and Competition: Theory, Measurement, Fact ( Cambridge, Mass.: Ballinger Publishing Co., 1974).
2
Robert Dorfman and Peter Steiner, "Optimal Advertising and Optimal Quality," American Economic Review, vol. 44 ( December 1954), pp. 826-836.
3
See Part 4 in this volume. For a survey see also, Michael Porter, Interbrand Choice, Strategy and Bilateral Market Power ( Cambridge, Mass.: Harvard University Press, 1976), James M. Ferguson, Advertising and Competition, chapter 5; and Stanley I. Ornstein, Advertising and Concentration ( Washington, D.C.: American Enterprise Institute, 1977).

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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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