Search Goods vs Experience Goods Search Goods: Consumers can identify the quality and other characteristics of the product before the actual urchase but need to search for best deals Examples: tomatoes, shirts, standardized products Experience Goods: Consumers need to try goods and experience them before they can know quality and other characteristics. Examples: new models of cars and many electrical appliances with unknown durability and failure rates
Search Goods vs. Experience Goods • Search Goods: Consumers can identify the quality and other characteristics of the product before the actual Purchase, but need to search for best deals. Examples: tomatoes, shirts, standardized products. • Experience Goods: Consumers need to try goods and experience them before they can know quality and other characteristics. Examples: new models of cars and many electrical appliances with unknown durability and failure rates
Search goods vs Experience goods Nelson claims that the effects of advertising may vary between these two groups of products because consumers do not depend on information obtained from the manufacturers concerning search products(since consumers find it by themselves ). However, consumers do rely on advertisements when they purchase experience goods Conjecture: Consumers will be more responsive to advertising for experience goods as it provides an inexpensive way to learn about the good Several tests have also confirmed that advertising of experienced products is more intensive(in terms of the ratio of advertising expenditure to sales) than advertising of search goodS
Search Goods vs. Experience Goods • Nelson claims that the effects of advertising may vary between these two groups of products, because consumers do not depend on information obtained from the manufacturers concerning search products (since consumers find it by themselves). However, consumers do rely on advertisements when they purchase experience goods. • Conjecture: Consumers will be more responsive to advertising for experience goods as it provides an inexpensive way to learn about the good. • Several tests have also confirmed that advertising of experienced products is more intensive (in terms of the ratio of advertising expenditure to sales) than advertising of search goods
Persuasive advertising vs Informative Advertising ersuasive advertising intends to enhance consumer tastes for a certain product Enhance brand loyalty Create barrier to entry Wasteful and anti-competitive Informative advertising carries basic product information such as characteristics, prices, and where to buy it Reduce consumer search cost Pro-competitive
Persuasive Advertising vs. Informative Advertising • Persuasive advertising intends to enhance consumer tastes for a certain product. Enhance brand loyalty Create barrier to entry Wasteful and anti-competitive. • Informative advertising carries basic product information such as characteristics, prices, and where to buy it. Reduce consumer search cost Pro-competitive
Persuasive advertising 11.1. I The monopoly's profit-maximizing level of advertisin Consider a monopoly firm selling a single product in a market where the demand curve is given by Q(A, P)=BAp, where p>0,0<EA<l, and ep<-1 (111) The parameter a denotes the firm s expenditure on advertising, o and p denote the quantity demanded and the price for this product. Thus, the quantity demanded is monotonically increasing with the level of advertising(A) but at a decreasing rate(since eA <1) Denoting by n, (A, p) and n, (A, p) the demand advertising elasticity and price elasticity respectively, and recalling subsection 3 2. 1, where we showed the exponents of the variables in an exponential demand function (illustrated in Figure 3. 4) are the elasticities of the corresponding variables, the reader can verify tha =Aand≡(A,p)P (112
Persuasive Advertising
Persuasive Advertising Let c denote the unit cost of the product. The monopoly has two choice variables: the price(p)and the advertising expenditure(A). Thus, the monopoly solves max (a, p )=pQ-dQ-A=BA p**l-cBAAp"*-A. (11.3) The first-order condition with respect to price is given by A,p) BA(e, +1) '-cBA epp'7-1 (114 p implying that r-2,° and hence p-= The first-order condition with respect to advertising level is given b aT(A, P BeAA"(p-c)-1 (11.6) plying th gAeA一 Be (1?)
Persuasive Advertising