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LECTURE 6:
OTHER TYPES OF ADVERTISING
AEM 4550:
Economics of Advertising
Prof. Jura Liaukonyte
Lecture Plan
 Persuaders
 Informative view
 Model and Examples
 Signaling as Information
 “Memory Jamming” view
Informative Advertising
Comparison
Persuasive/Complementary Model
 Higher advertising leads to
higher demand for each
consumer, which leads to higher
prices.
Informative Model
 Higher levels of advertising leads
to more consumers but not a
higher demand for each consumer,
so prices are not affected by
advertising levels.
Signaling as Information
 For experience goods, advertising can also be used to signal
quality.
 If a company engages in an expensive ad campaign, you
might infer that the good is high quality because only high
quality firms could afford the campaign.
 Price is can also be used as a signal of high quality.
Signaling as Information
 Nelson, 1970 begins with a simple question:
 How, exactly, does advertising provide information to
consumers?
 The informative content of advertising is clear, when the
advertisement contains direct information as to the existence,
location, function or price of a product.
 But what about all of the advertising that does not contain
direct information of this kind? Is it persuasive?
 Nelson argues rather that such advertising still plays an
informative role, although the role is indirect.
Signaling as Information
 To develop this argument, Nelson (1970) makes a distinction
between search and experience goods.
 Recall, a search good is one whose quality can be determined
prior to purchase (but perhaps after costly search),
 The quality of an experience good can be evaluated only after
consumption occurs.
 Indirect information contained in advertising is especially
important for experience goods.
Signaling as Information
 3 reasons why advertising may provide indirect information about
experience goods.
1. Signaling-efficiency effect.

The demand expansion that advertising induces is most valuable
to efficient firms,

By advertising, a firm signals that it is efficient, which implies in
turn that it offers good quality/good deal.
Signaling as Information
Match-products-to-buyers effect.
2.


Consumers may have heterogeneous tastes, and it may be
difficult to efficiently match products and buyers.
A seemingly uninformative ad can assist in this process, since
a firm has the incentive to direct its advertising toward the
consumers that value its product the most.
Signaling as Information
Repeat-business effect.
3.

Ads may remind consumers of their previous experience with
the product, and such recollections are of more value to
sellers of high-quality goods.

Even new consumers may draw a positive association between
advertising and quality, and advertising thus may signal
quality.

Similar to “Memory Jamming” View
Signaling and Search Products
 Ads can provide indirect information here as well.
 Recall signaling-efficiency effect: even if a search good
advertisement contains no direct information, the fact that the
good is advertised may suggest that the seller is efficient
 However, search goods offer greater potential for direct
information transmission through advertising
 I.e., ads for experience qualities is dominantly indirect
information and advertising for search qualities is dominantly
direct information
Evidence of the Signaling Theory
 Advertising intensity is higher for experience goods
 The ratio of TV to magazine advertising is significantly higher
for experience goods
 Search goods are especially conducive to the transfer of direct
information
Memory Jamming View of Advertisement
Memory Jam
 Why do familiar brands such as Coca-Cola and McDonald’s
advertise so heavily?
 With the average American drinking 10 gallons of Coca-Cola
each year, it’s hard to believe there is much left for most
consumers to learn about what’s inside the can.
 Advertising might also influence the way consumers encode
and recall their consumption experiences.
Memory Jam
 Psychological studies show that people can quite easily forget
the origin of a memory.
 E.g. the stranger’s face is familiar, the individual cannot
remember why.
 When people don’t directly recall the source of a memory, they
use what they know to fill in the gaps.
Memory Jam: Experiment
 Researcher gave participants orange juice spiked with salt
and vinegar.
 Results showed that people who watched advertisements for
the juice after the taste test remembered the juice as tasting
good.
 Even though what they actually consumed was designed to
taste terrible.
 Ads changed recollection of the sensory experience of tasting
the juice, even in the very short-term.
Memory Jamming View: Formalized
 Economic theory of advertising based on limited consumer
memory
 Consumers learn through experience: how much they enjoy
consuming a firm’s product
 Each consumer stores in memory the utility he has received
from consuming the product during each past experience
 At the point of purchase, the consumer recalls the utility of
these experiences to memory
Memory Jamming View: Formalized
 The firm can use advertising to change the likelihood that the
consumer will remember a favorable consumption experience
 Consistent with a large literature in the psychology of memory
Example: Breakfast Cereal Industry
Memory Jamming
 Average preschooler sees 642 ads/year on TV
 Memorable slogans
 Lucky Charms: They’re magically delicious!
 Paired with creative cartoons- easily recall figures and
mascots
Example: Soft Drink Industry
Memmory Jamming
 Need for the players to advertise heavily
 Reminds the experience more than what is inside the can
 Changes the way a consumer remembers an experience
 Coca-Cola’s main type of advertising
Supply Side Advertising
Combative Advertising
 Combative advertising, a characteristic of mature markets, is
defined as advertising that shifts consumer preferences
towards the advertising firm, but does not expand the
category demand.
 Not about influencing the consumer preferences, but rather
about the supply side and advertising
 Redistributes consumers among brands. If the real differences
between brands are modest, then combative advertising may be
excessive
 Basis of Prisoner's dilemma in advertising
Prisoner's Dilemma
Advertising Wars
 The prisoner's dilemma applies to advertising
 All firms advertising tends to equalize the effects
 Everyone would gain if no one advertised
 Advertising Wars
Two firms spend millions on TV ads to steal business from each
other. Each firm’s ad cancels out the effects of the other,
and both firms’ profits fall by the cost of the ads.
Cigarette Advertising on TV
 All US tobacco companies advertised heavily
1964
on TV
 Surgeon General issues official warning
 Cigarette smoking may be hazardous
 Cigarette companies fear lawsuits
 Government may recover healthcare costs
1970
 Companies strike agreement
 Carry the warning label and cease TV advertising in
exchange for immunity from federal lawsuits.