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Advertising as a Distortion of Social Learning

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Author Info
Brekke, Kjell Arne () (The Ragnar Frisch Centre for Economic Research)
Rege, Mari () (University of Stavanger)
Abstract

By combining a theory of herding behavior with the phenomenon of availability heuristic, this paper shows that non-informative advertisements can affect people’s choices by influencing their perception of product quality. We present a model in which people can learn about product quality by observing the choices of others. Consumers are, however, not able to fully distinguish between the observations of real people and fictitious characters in advertisements. Even if a person is aware of this limitation and updates his beliefs accordingly, it is still rational for him to choose the product he has observed most often. In equilibrium the most observed product is always most likely to be of the highest quality. The analysis has important policy implications.

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File URL: http://www.oekonomi.uio.no/memo/memopdf/memo2306.pdf
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Publisher Info
Paper provided by Oslo University, Department of Economics in its series Memorandum with number 23/2006.

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Length: 22 pages
Date of creation: 14 Nov 2006
Date of revision:
Handle: RePEc:hhs:osloec:2006_023

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
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Fax: 22 85 50 35
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Related research
Keywords: Advertising; availability heuristic; herding behavior; information; product quality;

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-70, Summer. [Downloadable!] (restricted)
  2. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics. [Downloadable!]
    Other versions:
  3. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June. [Downloadable!] (restricted)
  4. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Blackwell Publishing, vol. 49(4), pages 499-516, October. [Downloadable!] (restricted)
  5. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August. [Downloadable!] (restricted)
  6. Albrecht, James & Lang, Harald & Vroman, Susan, 2002. "The effect of information on the well-being of the uninformed: what's the chance of getting a decent meal in an unfamiliar city?," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 139-162, February. [Downloadable!] (restricted)
  7. Kwoka, John E, Jr, 1984. "Advertising and the Price and Quality of Optometric Services," American Economic Review, American Economic Association, vol. 74(1), pages 211-16, March.
  8. Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, vol. 87(5), pages 847-62, December. [Downloadable!] (restricted)
  9. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
  10. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  11. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March. [Downloadable!] (restricted)
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  12. Bisin, A. & Verdier, T., 1997. "The Economics of Cultural Transmission and the Dynamics of Preferences," DELTA Working Papers 97-03, DELTA (Ecole normale supérieure).
    Other versions:
  13. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August. [Downloadable!] (restricted)
    Other versions:
  14. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
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