[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

To emphasize the different roles played by advertising, economists distinguish
between informative advertising and persuasive advertising. The intent of the former
is to provide consumers with information about the price of a good, where it may
be acquired, or what its characteristics are. The intent of persuasive advertising is
to make consumers feel good about the product. To that end, advertisers may even
provide “disinformation,” seeking to confuse consumers into perceiving differences
among goods that are essentially the same.
ADVERTISING AND COMPETITION
Advertising is both a cause and a consequence of imperfect competition. In a perfectly
competitive industry, in which many producers make identical goods, it would
not pay any single producer to advertise the merits of its product. We do not see
advertisements for wheat or corn. If such advertising were successful, it would simply
shift the demand curve for the product out. This increase in the total demand for
wheat would have a negligible effect on the wheat grower who paid for the advertisement.
The industry as a whole might benefit, however, if all the wheat farmers could
get together and advertise as a group. In recent years, associations representing
producers of milk, oranges, almonds, raisins, and beef have done just that.
But if advertising can create in consumers’ minds the perception that products
are different, then firms will face downward-sloping demand curves. There will be
imperfect competition. And once imperfect competition exists, advertising can be
used to increase the demand for a firm’s products.
p 3
D
C
PRICE (p)
p 2
p 1
A
Marginal
revenue
curves
Figure 15.2
E
F
Q 1
B
G
Demand
curves
Marginal
cost curve
With advertising
Without advertising
With advertising
Q 2
Without advertising
QUANTITY (Q )
HOW ADVERTISING CAN SHIFT THE
DEMAND CURVE
Successful advertising shifts the demand curve facing a
firm. When the imperfect competitor equates its new
marginal revenue with its old marginal cost, it will be able
to raise both its price and its output.
ADVERTISING AND PROFITS
The objective of advertising is not only to change the slope of the
demand curve—by creating the perception of product differentiation—
but also to shift the demand curve out, as in Figure 15.2. The in−
crease in advertising by one firm may divert customers away from
rivals, or it may divert customers away from other products. Advertising
a particular brand of cigarettes may succeed in inducing
some smokers to switch brands and inducing some nonsmokers
to smoke.
The increase in profits from shifting the demand curve consists of
two parts. First, the firm can sell the same quantity it sold before but
at a higher price—p 3 , rather than p 1 . Profits then increase by the original
quantity (Q 1 ) times the change in price (p 3 − p 1 ), the rectangle
ABCD in the figure. Second, because the advertising has shifted the
firm’s marginal revenue curve up, it can adjust the quantity it sells. As
usual, the imperfectly competitive firm sets marginal revenue equal
to marginal cost, so it increases output from Q 1 to Q 2 . The additional profits
thus generated are measured by the area between the marginal
revenue and marginal cost curves between Q 1 and Q 2 . Marginal cost
348 ∂ CHAPTER 15 IMPERFECT INFORMATION IN THE PRODUCT MARKET