Advertizing

["Rajiv Sethi" <SETHI@xxxxxxxxxxxxxxxx>]

Two comments about advertizing:

1.  Restrictions on advertizing tend to raise the prices of certain
goods and services, presumably by reducing competetive pressure. John
Kwoka's (1984 AER) study is paraphrased by Scherer/Ross in their book
(Industrial Market Structure and Economic Performance) as follows:
"the examination prices of optometrists advertizing in media other
than the Yellow Pages were roughly 45% lower than comparable prices
in cities where advertizing was prohibited." The prohibition was part
of an FTC experiment.

2.  Advertizing choices are indeed Nash responses in a Prisoner's
dilemma, individually rational but sub-optimal from the point of
view of the group. In this regard they are much like price cuts by
oligopolists. This raises the question of why oligopolists who face
each other repeatedly in the same markets cannot collectively
restrain advertizing expenditures although they are generally quite
successful at resisting price cuts. The following explanation, also
by Scherer/Ross, sounds fairly plausible: "Any fool can match a
price cut, but counteracting a clever advertizing gambit is far from
easy. In this unpredicatable clash of creative power, sellers often
overestimate their ability to make market share gains and
underestimate their rivals' ability to retaliate sucessfully,
exhibiting little concern for mutual interdependence.''




_______________________________________________________________
Rajiv Sethi, The University of Vermont, Department of Economics
Tel: (802) 656 0946                         Fax: (802) 656 8405