Econ of Advertising Exam 1

Direct Information

"hard", factual information (price, location, warranty, etc)

Reservation price

1) the lowest price at which a firm is willing to sell a good 2)the highest price at which a consumer is willing to buy a good

economics of advertising 3 main questions

-how does advertising influence consumer choices? -does advertising enhance welfare or is it wasteful? -how does advertising affect market structure?

Combative Advertising

Advertising that shifts consumer preferences toward the advertising firm but does not expand the overall product demand

Indirect Information

Information that is not obvious, but must be inferred

Indirect (soft) information

Information thats difficult to completely summarize in a numeric fashion, that requires a knowledge of its context to fully understand, and that becomes less useful when separated from the environment in which it was collected

Advertising

The term advertising generally refers to paid forms of communication that are distributed at the initiative of economic operators (by means of television, radio, newspapers, banners, mail, internet, etc) as part of intentional and systematic effort to affect individual attitudes and choices in relation to the consumption of goods and services.

attribute theory

the notion that consumers derive utility not from the overall product itself, but form the characteristics or attributes of the product; hence, the demand for the product is derived from the demand for it properties

Signaling

An action undertaken by the informed party under asymmetric information to credibly convey its information to the uninformed party. The information is conveyed through a costly signal (a gesture, sound, or action which is intended to communicate a particular message)

Barriers to entry

a cost of producing that must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry

Persuasion

a form of communication that uses argument or emotion to make the listener or reader believe what is being communicated

Deadweight loss

a loss of total surplus due to a departure from the optimal allocation of resources

Search good

a product whose attributes can be evaluated prior to purchase and consumption (e.g., a hammer)

experience good

a product whose characteristics can be accurately evaluated only after the product has been purchased and "experienced" (e.g., cruise) Consumers may have difficulty accurately making consumption decisions for experience goods because of the lack of pre-purchase information

Imperfect Information

a situation in which information is not complete or perfect-parties to a (potential) transaction lack relevant information

Product Differentiation

a strategy used by firms to distinguish a product or service from other similar ones available in the market

Perceptual Map

a visual representation of customers' or potential customers' perceptions about specific attributes of product; reveal the how consumers perceive the relative strengths or competing products in a particular market

associations

connections-feeling, memories, or thoughts between people and other people or things; associations can be formed directly(e.g, from a consumer's experiences and contact with the product) or indirectly (e.g., through advertising or by some other source of information, such as word of mouth)

Central route to persuasion

consists of thoughtful consideration of the arguments (ideas, content) of the message. When a receiver is doing central processing, he or she is being an active participant in the process of persuasion. Central processing has two prerequisites: it can only occur when the receiver has both the motivation and the ability to think about the message and its topic.

Value Expressive Consumption

consumption decisions that allow a consumer to demonstrate her/his self image to others; product symbolism tends to be important

Complementary view of advertising

This view that consumer tastes and preferences are fixed and that advertising directly interacts with tastes and preferences in a way that complements the consumption of the advertised product; rather than persuade buyers to change their tastes, advertising build on predetermined tastes by offering a stimulus to receive more of something that customers already value. for example "social prestige"

Monopolistic competition

market structure with a large number of firms and low barriers to entry in which produce differentiated products that re relatively lose substitutes for each other

Market Power

the ability of a firm to raise price above the perfectly competitive level without attracting entry

Marginal cost

the additional cost incurred int he production of an additional unit of output. It corresponds to the slope of the total cost function at each point

Welfare implications

the analysis of the effect of advertising or other phenomena (e.g., taxes, barriers to entry) on the allocation of resources and hence their effect on social well-being

Marginal Benefit

the benefit (in terms utility) of consuming an additional unit of a good for the individual who chooses to consume it

Consumer surplus

the consumer's willingness to pay (given by the reservation price) for a good minus the price actually paid for the good, summed across all units sold

Information overload

the difficulty in understanding an issue and effectively making decisions because one has too much information about that issue.

"True" Selling Costs

the production costs that are necessary to put good on the market

Search Cost

the time, energy and money expended by a consumer to research a product or service prior to purchase. Search costs include the opportunity cost of the time and energy spent on search and the money spent to travel between stores, consult experts for purchase advice an acquire data.

total surplus

the total gains from trade, or exchange, received by all parties involved in the exchange; i.e., the sum of consumer surplus and producer surplus

Shopping good

typically a durable good with relatively high price that is infrequently purchased. Search is relatively extensive as a consumer compared products based on their suitability, quality, price, style, etc. (e.g., furniture)

Market failure

a situation in which markets allocate resources in a Pareto-inefficient way

Dependence Effect

Idea that as an economy becomes increasingly wealthy, consumers' wants are increasingly created through the advertising of firms who make the products that will then be sold to satisfy consumers' wants.

Direct (hard) information

Hard information is quantitative easy to store and transmit in impersonal ways, and its information content is independent of its collection

Economics

The branch of the social sciences concerned primarily with analyzing and explaining human behavior in making decisions about the allocation of scarce resources. Economists study the complex ways in which the following are determined within a society:

Allocation

The division of things into shares or portions. In economics, the term refers primarily to the "allocation of resources" the process by which economic resources get allotted (apportioned, assigned) to their particular uses for directly or indirectly satisfying human wants.

producer surplus

actual price at which a firm sells a good minus the minimum price the firm would have been willing to accept to sell the good, summed across all units sold

Advertising Costs

advertising is a "selling cost" that alters consumers' valuations of goods, persuading them to increase their value of more heavily advertised products

Constructive advertising

advertising that build demand by conveying economically relevant information to the consumers

Advertising and utility

advertisng can be treated as a "good" in consumer's utility function- either because they receive utility from the ad itself (e.g, its humorous and makes them laugh) or because a good itself and its advertising are linked by complementaries in their joint consumption

pareto efficient

an allocation with the property that there's no alternative technically feasible allocation in which at least one person could be better off without making at least one other person worse off

goodwill

an intangible asset representing the value of a firm's brand names, good customer relations, extensive customer base, excellent employee relations, proprietary technology or patents, etc.

Economies of Scale

economies of scale are a fall in the long run average costs because of increased production

Information

facts or details about a person, company, product, situation, etc

Convenience goods

goods that are widely and easily available in the market and require minimal shopping effort on part of buyers (e.g., gasoline)

Asymmetric Information

occurs when one party has more or better information than the other.

Word of mouth

occurs when satisfied (dissatisfied) customers tell others about their positive (negative) experiences with others. Its one of the most credible forms of advertising because people attach more credibility to their acquaintances comments than to commercial messages

Peripheral route persuasion

occurs when the listener decides whether to agree with the message based on other cues besides the strength of the arguments or ideas in the message

Conspicuous Consumption

refers to the consumption of good that are known to expensive as a displays of high income and wealth gain in order to maintain status rather than to meet real needs; others emulate this behavior

Image Advertising

seeks to create a specific image for a product by building a favorable mental image of the product in the consumer's mind; rather than promote specific attributes of the product, this advertising attempts to create an image of reliability, luxury, trust, ruggedness, style, etc.

Complement

something that fills up, completes, or makes another thing better or perfect