# Issues in Advertising: The Economics of Persuasion

By David G. Tuerck | Go to book overview

the coefficients of each of the measures should have the predicted sign even when they are all included in the sample multiple regression. The absolute values of both the t values (which measure significance) and the coefficients will be considerably lower in the multiple regression than in the simple regressions. The inclusion as independent variables of several measures of the same independent variable win produce that result. Table 4 records the multiple regressions of each market characteristic on the other market characteristics and durability. All of the signs are in the right direction.

There is one more exceedingly strong test of our theory. It is not only a test of the relevance of information variables in determining market characteristics, but a test of the precise formulation of the relationship we have been using and a test of whether R is the exclusive reason for the relationship between the market characteristics. If R is the exclusive reason for the relationship between market characteristics, one can predict the value of the correlation coefficients as well as their Sip.28 For most of the correlation coefficients R passes this test fairly well (see Table 5). The few exceptions can be easily explained.29 All in all, this evidence strongly supports the theory that advertising is information.

Appendix A: Derivation of the Relationship between A and P*

Assuming a translog production function, quantity demanded (Q) is the following function of prices* (P) and advertising expenditures (A).

lnQ = α0 + α1lnP + α2lnA + (A.1)
α3lnPlnA + α4(lnP)2 + α5(lnA)2

The price elasticity of demand in absolute terms (εp) is given by:

(A.2)

The advertising elasticity of demand (εA) equals:

(A.3)

Schmalensee and others have shown that a firm that is maximizing profits will operate such that:30

(A.4)

____________________
28
Given those conditions, equation (2) in note 26 generates the following relation between correlation coefficients.
29
Nelson, "Consumer Information and Advertising," forthcoming.
30
Schmalensee, The Economics of Advertising, p. 22.

-156-

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Issues in Advertising: The Economics of Persuasion

• 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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