Note that rather than reflecting some bounded rationality, coarse thinking is formally
equivalent to restricted information regarding the state of the world. It is analogous to the
situation considered by
Shin (1994), where the buyer is uncertain about the ability of a
producer to certify that its quality is high (see
Section 4.3.4.1). This lack of information
could, however, be attributed to some improper initial information processing that
would explain the confusion between different messages. A more convincing story
would require a full equilibrium analysis that would clarify where these different messages
come from, how consumers become informed about them, and how they are used in the
different categories by different agents. It would also be useful to allow for repeat
purchases.
The next subsection looks at the dynamics of advertising and how much of this
dynamics can be explained by the transmission of information.
4.6.3 Advertising and Goodwill
It has been recognized for a long time that advertising may have some potentially large
dynamic impact. The standard argument, which is a cornerstone of the persuasive view,
that advertising is a very effective barrier to entry, requires that the incumbent’s adver-
tising has some lasting impact that cannot be overcome by potential entrants. It is then
natural to think of advertising as contributing to a stock of “goodwill” in favor of the
advertised brand or product. A substantial strand of research that traces back to
Nerlove and Arrow (1962) has investigated the dynamics of firm advertising, both the-
oretically and empirically.
67
This goodwill dynamics may also explain why well-
established brands or products may remain heavily advertised.
A key question here, which is at the heart of this chapter’s inquiry, is whether good-
will can be construed as resulting from informational dynamics, or whether it reflects
some non-informative impact of advertising on consumer behavior, along the persuasive
view or the complementary good interpretations. The following discussion is organized
around two potential sources of information dynamics: the matching of consumers to
products and the evolution of consumer awareness of a brand or product.
As suggested by
Tirole (1988, subsection 2.6.1.1), goodwill may reflect consumer
learning about how well the product matches tastes. In Tirole’s two-period example,
a monopoly firm can get more consumers to learn in a first period whether they like
the product or not, by lowering its price. This in turn increases the pool of consumers
who have a high willingness to pay in the second period. Hence, a low price in the first
67
For instance, Roberts and Samuelson (1988) estimate a structural model of non-price rivalry in the US
cigarette industry. They estimate advertising first-order conditions allowing for goodwill accumulation
allowing each firm to react to its rival’s advertising in the previous period (see
Bagwell, 2007, for more
details).
Dube
´
et al. (2005) propose a model of goodwill accumulation where advertising only contributes
to goodwill if its intensity is sufficiently high at a given time. They then use the model to explain the
“pulsing” nature of firms’ advertising behavior.
194
Handbook of Media Economics
period is an investment that generates a more profitable market in the second period.
Bergemann and Vlimki (2006) take this principle to a dynamic infinite horizon monop-
oly setting where the firm and consumers are forward looking and consumers may buy
the product repeatedly. Consumers learn about their match through consumption of the
product, in which case they randomly receive a perfectly informative signal at some
exogenous rate. It is therefore an experience good model. The dynamics of pricing
and consumer learning can be decomposed into two phases: an early phase and a mature
phase. In the early phase, the marginal consumer is uninformed, whereas in the mature
phase the marginal consumer is informed. The nature of the mature phase critically
depends on two parameters: the monopoly price against a demand from a population
of consumers who know their match perfectly, denoted ^p, and the willingness to pay
of an uninformed consumer who expects that the price will be ^p forever after time t (time
is treated as continuous), which is denoted ^w. Bergemann and Vlimki characterize the
situation as a mass market if ^w > ^p. The firm then sells to both informed and uninformed
consumers in the mature phase and its price decreases as more consumers become
informed. In the reverse situation, labeled niche market, the firm only sells to informed
consumers in the mature phase and its price is kept constant at ^p.
Saak (2012) studies how the firm could use informative advertising in this setting. He
considers two possible roles for advertising. A first role is to increase the rate at which
consumers who are consuming the product learn about their match. A second role is
to provide direct information to consumers about their match with the product, even
if they do not purchase it. Saak varies the extent to which advertising is effective in this
latter respect from no impact to a full impact, meaning that advertising is as informative
for non-purchasing consumers as it is for purchasing consumers. He finds that advertising
intensity typically peaks during the early stage. In a mass market, advertising stops before
the end of the early stage. In that case, the firm balances a short-run benefit with a
long-run loss from advertising. More advertising means that there will be more informed
consumers in the mature phase, which in turn implies lower price. Indeed, informed
consumers are the source of demand elasticity. The short-run benefit is then to increase
the willingness to pay of uninformed consumers at time t because they expect that, if they
end up liking the product, they will benefit from lower prices in the future. Because the
marginal consumer is uninformed in the early stage, this enables the firm to charge a
higher price. However, lower future prices mean lower future profits so that the
long-term impact of advertising is detrimental. Getting closer to the end of the early
phase, this negative effect dominates and the firm stops advertising. By contrast, in a niche
market, in the mature phase the firm sells to informed consumers alone and price is ^p.
There is therefore a long-run benefit from advertising which is the standard expended
demand effect. Then the firm keeps on advertising all the way through the mature phase.
This is the case as long as the advertised information reaches some consumers who are not
purchasing the product (who are the uninformed in the mature phase of a niche market).
195Advertising in Markets
The analysis in Saak (2012) shows that a firm may keep on advertising a product indef-
initely to accumulate some goodwill that results from better consumer information. One
possible testable prediction would be that this is more likely to be the case for niche
markets than for mass markets. Still it would be necessary to identify to what extent this
persistent advertising activity may be attributed to information rather than some alterna-
tive non-informative sources of goodwill.
As discussed by
Bagwell (2007, subsection 8.1), there is a substantial empirical liter-
ature that suggests that advertising does not impact household behavior much, if the
household has some previous experience with the product (e.g.,
Deighton et al.,
1994; Erdem and Keane, 1996; Ackerberg, 2001
). In his reduced-form analysis of house-
hold purchases of Yoplait yoghurts,
Ackerberg (2001) makes the identifying assumption
that, if advertising had a persuasive impact or was a complementary good, then it should
affect the household’s choice whether or not it has had some previous experience with
the product or the brand. He finds that advertising only has a significant impact on pur-
chase decisions of new customers of Yoplait yoghurts. This supports the view that the
main role of advertising is to provide these consumers with information that induces then
to purchase the product. Although this is broadly consistent with the theoretical setting in
Saak (2012) (in particular with his assumption that yields persistent advertising in a niche
market), the exact nature of that information remains to be characterized. As discussed in
Section 4.4.1, Ackerberg (2003), in his structural model, proposes to interpret this new
information as quality signaling. Some information about the content of the ad messages
would be needed in order to know whether they might contain direct information.
Ippolito and Mathios (1990) use a natural experiment to indirectly control for ad content.
They study the impact of the 1985 termination of the ban on health claim advertising by
cereal producers in the US on cereal brand consumption. They find that the end of the
ban led to a significant increase in the consumption of fiber cereals.
Short of having detailed content information or some appropriate natural experiment
as in
Ippolito and Mathios (1990), it is not clear whether an improved perceived quality
should be interpreted as information or as resulting from some persuasion or complemen-
tary good effect of advertising (see the discussion in
Section 4.6.1 above). A recent mar-
keting literature explores whether goodwill can be attributed to an improved perceived
quality or, rather, to an improved product awareness, which is unambiguously better
information.
Clark et al. (2009) use a consumer survey dataset over the period
20002005. It provides on a yearly basis a brand awareness score and a perceived quality
score for top brands (in terms of sales) in 25 broad product categories. They estimate
a two-equation recursive model of perceived quality and brand awareness inspired by
Nerlove and Arrow (1962). Advertising expenditure contributes to the evolution of both
perceived quality and brand awareness. They use the panel structure of their data to solve
for endogeneity and account for unobserved heterogeneity across brands. They find that
advertising effects brand awareness positively and significantly, whereas its impact on
196 Handbook of Media Economics
perceived quality is insignificant. Barroso and Llobet (2012) address a related question
using a structural empirical model. In their model, advertising has both an immediate
impact and a dynamic impact on awareness. It also has a direct impact on consumer util-
ity, though it is modeled as purely static. They consider the automobile market in Spain
in the 1990s. Similarly to
Sovinsky-Goeree (2008), they simulate consumer choice sets
(see
Section 4.2.5). Their main finding is that advertising has a strong role in speeding up
product awareness and this is best accounted for by using a specification where advertising
has a lasting impact on awareness. They also find that advertising has a significant direct
impact on consumer utility that can be interpreted as perceived quality.
In summary, these various empirical studies provide some empirical support for an
informative role of advertising in its contribution to a product’s goodwill, either by
providing product information or by contributing to product awareness.
4.6.4 Concluding Remarks
Viewing advertising, whether informative or not, as a commodity just like any other
seems tempting and quite natural for economists. It then suffices to characterize the
supply-side and demand-side conditions for this commodity, and to apply standard eco-
nomic arguments on competition (perfect or not), technology or externalities. Surpris-
ingly, it was only less than 40 years ago that
Stigler and Becker (1977) set out to put
together such a theory of advertising (along with other social phenomena). Their main
objective was to show that advertising could be supplied by a competitive market. It is
then possible to develop a first fundamental theorem of welfare economics argument to
show that it is optimally supplied. Once we move away from the ideal world of perfect
competition however, things become rapidly more complicated. For instance, market
power does not necessarily induce under-provision of advertising. This is because adver-
tising is complementary to and jointly provided with the advertised product, which is
typically not sold on a competitive market. Besides, different forms of advertising may
affect consumer welfare in different manners.
Becker and Murphy (1993) provide a stim-
ulating discussion of the welfare economics of advertising, depending on its impact on
consumer utility and on the competitive environment. In particular, they consider the
possibility of charging consumers for advertising as well as the possibility that advertising
may end up being a bad because it interferes with the consumer’s access to news or enter-
tainment. These two themes are obviously very relevant for the overall inquiry of this
handbook.
The complementary good approach is often presented by its proponents in stark
opposition to the more traditional persuasive view, which assumes that advertising is a
taste shifter. For instance,
Becker and Murphy (1993, p. 956) point out the difficulties
involved in performing the welfare economics of taste shifting. Yet, as explained in
Section 4.6.1, the persuasive view may be characterized in a simpler way by having
197Advertising in Markets
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