IDEAS home Printed from https://ideas.repec.org/p/oxf/wpaper/185.html
   My bibliography  Save this paper

On the Simple Economics of Advertising, Marketing, and Product Design

Author

Listed:
  • David P. Myatt
  • Justin P. Johnson
  • Johnson Graduate School of Management
  • Cornell University

Abstract

We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers` valuations, which lead to rotations of the demand curve. In a wide variety of settings, profits are a U-shaped function of dispersion. A high level of dispersion is complemented by a niche posture, and low dispersion is complemented by a mass-market posture. We investigate numerous applications of our framework, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand.

Suggested Citation

  • David P. Myatt & Justin P. Johnson & Johnson Graduate School of Management & Cornell University, 2004. "On the Simple Economics of Advertising, Marketing, and Product Design," Economics Series Working Papers 185, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:185
    as

    Download full text from publisher

    File URL: https://ora.ox.ac.uk/objects/uuid:5d6843e5-9cdc-43ae-b772-43cffd666574
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Che, Yeon-Koo, 1996. "Customer Return Policies for Experience Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 17-24, March.
    2. Gary S. Becker & Kevin M. Murphy, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 941-964.
    3. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
    4. Ian Jewitt, 1989. "Choosing Between Risky Prospects: The Characterization of Comparative Statics Results, and Location Independent Risk," Management Science, INFORMS, vol. 35(1), pages 60-70, January.
    5. Stigler, George J., 2011. "Economics of Information," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    6. Lewis, Tracy R. & Sappington, David E. M., 1991. "All-or-nothing information control," Economics Letters, Elsevier, vol. 37(2), pages 111-113, October.
    7. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 63-81.
    8. Chifeng Dai & Tracy R. Lewis & Giuseppe Lopomo, 2006. "Delegating management to experts," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 503-520, September.
    9. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    10. C. J. Aislabie & C. A. Tisdell, 1988. "Profit maximization and marketing strategies: Demand rotation and social influences," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 77-82, March.
    11. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
    12. Avinash Dixit & Victor Norman, 1978. "Advertising and Welfare," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 1-17, Spring.
    13. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
    14. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Contracts and Productive Information Gathering," Games and Economic Behavior, Elsevier, vol. 25(2), pages 174-193, November.
    15. Simon P. Anderson & Régis Renault, 2006. "Advertising Content," American Economic Review, American Economic Association, vol. 96(1), pages 93-113, March.
    16. Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring.
    17. Schmalensee, Richard, 1982. "Commodity Bundling by Single-Product Monopolies," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 67-71, April.
    18. 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.
    19. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, September.
    20. Kenneth L. Judd & Michael H. Riordan, 1994. "Price and Quality in a New Product Monopoly," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 773-789.
    21. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-327, May.
    22. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    23. Ian Jewitt, 1987. "Risk Aversion and the Choice Between Risky Prospects: The Preservation of Comparative Statics Results," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 73-85.
    24. Carl Shapiro, 1980. "Advertising and Welfare: Comment," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 749-752, Autumn.
    25. Justin P. Johnson Author-Email: jpj25@cornell.edu Author-Workplace-Name: Cornell University & David P. Myatt, 2006. "Multiproduct Cournot Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 583-601, Autumn.
    26. Coes, Donald V, 1977. "Firm Output and Changes in Uncertainty," American Economic Review, American Economic Association, vol. 67(2), pages 249-251, March.
    27. Marco Ottaviani & Andrea Prat, 2001. "The Value of Public Information in Monopoly," Econometrica, Econometric Society, vol. 69(6), pages 1673-1683, November.
    28. Margaret A. Meyer, 1994. "The Dynamics of Learning with Team Production: Implications for Task Assignment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1157-1184.
    29. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    30. Johnson Justin P, 2005. "Entry-Level Products with Consumer Learning," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-33, September.
    31. Courty, Pascal, 2003. "Ticket Pricing under Demand Uncertainty," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 627-652, October.
    32. Comanor, William S & Wilson, Thomas A, 1971. "On Advertising and Profitability," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 408-410, November.
    33. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
    34. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
    35. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    36. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74(2), pages 132-132.
    37. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    38. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 371-383.
    39. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    40. Biehl, Andrew R, 2001. "Durable-Goods Monopoly with Stochastic Values," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 565-577, Autumn.
    41. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    42. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
    43. Sobel, Joel, 1993. "Information Control in the Principal-Agent Problem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 259-269, May.
    44. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
    45. Machina, Mark J & Pratt, John W, 1997. "Increasing Risk: Some Direct Constructions," Journal of Risk and Uncertainty, Springer, vol. 14(2), pages 103-127, March.
    46. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(3), pages 475-498.
    47. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 465-491.
    48. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
    49. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 28, pages 1701-1844, Elsevier.
    50. Lancaster, Kelvin, 1975. "Socially Optimal Product Differentiation," American Economic Review, American Economic Association, vol. 65(4), pages 567-585, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    2. Wang, Shinn-Shyr & Stiegert, Kyle W., 2006. "The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation," Staff Paper Series 496, University of Wisconsin, Agricultural and Applied Economics.
    3. Anderson, Simon P. & Gabszewicz, Jean J., 2006. "The Media and Advertising: A Tale of Two-Sided Markets," Handbook of the Economics of Art and Culture, in: V.A. Ginsburgh & D. Throsby (ed.), Handbook of the Economics of Art and Culture, edition 1, volume 1, chapter 18, pages 567-614, Elsevier.
    4. Nils‐Henrik M. von der Fehr & Kristin Stevik, 1998. "Persuasive Advertising and Product Differentiation," Southern Economic Journal, John Wiley & Sons, vol. 65(1), pages 113-126, July.
    5. Wang, Shinn-Shyr & Stiegert, Kyle W., 2006. "The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation," Staff Papers 12606, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    6. Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2018. "Deceptive Advertising with Rational Buyers," Management Science, INFORMS, vol. 64(3), pages 1291-1310, March.
    7. Simon P. Anderson, 2005. "Regulation of Television advertising," Virginia Economics Online Papers 363, University of Virginia, Department of Economics.
    8. Laurent Cavenaile & Pau Roldan-Blanco, 2021. "Advertising, Innovation, and Economic Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 251-303, July.
    9. Soberman, David A. & Xiang, Yi, 2022. "Designing the content of advertising in a differentiated market," International Journal of Research in Marketing, Elsevier, vol. 39(1), pages 190-211.
    10. Ulrich Doraszelski & Sarit Markovich, 2004. "Advertising Dynamics and Competitive Advantage," Computing in Economics and Finance 2004 61, Society for Computational Economics.
    11. Grunewald, Andreas & Kräkel, Matthias, 2017. "Advertising as signal jamming," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 91-113.
    12. McCarthy, Ian M., 2016. "Advertising intensity and welfare in an equilibrium search model," Economics Letters, Elsevier, vol. 141(C), pages 20-26.
    13. Ulrich Doraszelski & Sarit Markovich, 2007. "Advertising dynamics and competitive advantage," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 557-592, September.
    14. Doraszelski, Ulrich & Draganska, Michaela & Clark, C. Robert, 2007. "Information or Persuasion? An Empirical Investigation of the Effect of Advertising on Brand Awareness and Perceived Quality using Panel Data," Research Papers 1971, Stanford University, Graduate School of Business.
    15. Hattori, Keisuke & Higashida, Keisaku, 2014. "Misleading advertising and minimum quality standards," Information Economics and Policy, Elsevier, vol. 28(C), pages 1-14.
    16. Simon P. Anderson & Régis Renault, 2006. "Advertising Content," American Economic Review, American Economic Association, vol. 96(1), pages 93-113, March.
    17. Serafin Grundl & You Suk Kim, 2019. "Consumer mistakes and advertising: The case of mortgage refinancing," Quantitative Marketing and Economics (QME), Springer, vol. 17(2), pages 161-213, June.
    18. Simon P. Anderson & Régis Renault, 2013. "The Advertising Mix for a Search Good," Management Science, INFORMS, vol. 59(1), pages 69-83, April.
    19. W. David Bradford & Andrew N. Kleit, 2011. "Can Credence Advertising Effects Be Isolated? Can They Be Negative?: Evidence from Pharmaceuticals," Southern Economic Journal, John Wiley & Sons, vol. 78(1), pages 167-190, July.
    20. Laurent d'Ursel, 1983. "Politiques de « non-prix » : Equilibre et optimum," Revue Économique, Programme National Persée, vol. 34(6), pages 1057-1088.

    More about this item

    Keywords

    Monopoly; Uncertainty; Dispersion; Advertising; Marketing; Product Design; Product Lines; Price Discrimination;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:185. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.