The Economics of Advertising

About

The overarching aim of this course is to analyze advertising from the perspective of economics. Advertising plays an important role in markets, conveying information from sellers to potential buyers, creating barriers to entry, etc. At the core of microeconomics is the goal of efficiently using scarce resources. The economic analysis of advertising centers on whether advertising enhances or reduces the efficient use of resources. For example, when advertising provides consumers with information that helps them make better decisions, advertising is “good.” On the other hand, if adverting deceives people causing them to buy that isn’t what they thought it would be, then advertising is “bad.”

The course begins with an examination of the three primary economic views of advertising that have developed over the last century, with an emphasis on the welfare implications of each view. The persuasive view of advertising contends that advertising alters the preferences of consumers, changing their minds out what to buy. Emotional appeals lead to “less correct” choices, reducing well-being. The informative view argues that asymmetric information is common in markets, making it difficult to make an optimal decision. Advertising can provide direct (thought its content) or indirect (through its mere existence) information, helping consumers make wiser choices. The complementary perspective holds that advertising complements that product being advertised. For example, someone may buy an expensive automobile to obtain transportation services and prestige from owning it. Advertisements for the automobile enhance the image of it as luxury, making the automobile more valuable to the owner know than people who have seen the ad will view it as a status symbol.

With the three viewpoints as a backdrop, the course delves into specific topics. Some topics are producer focused – e.g., determining the profit maximizing optimal share of revenue to spend on advertising and identifying the duration of time that advertising impacts sales. Other topics concern consumers – e.g., consumers’ response to advertising in general and, in particular, cognitive biases that affect consumers’ susceptibility to advertising.

Other topics include market failures (e.g., collectively advertising a homogenous good), earnings management (e.g., timing advertising campaigns), and climate change (e.g., the direct [energy consumption] and indirect [promoting consumerism] roles of advertising).

Throughout the course economic concepts such as demand, supply, elasticity, surplus, barriers to entry, externality, public good, and others will be used to explain and assess advertising practices

Course leader

Gary D. Ferrier

Target group

Bachelor's Level

Fee info