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Advertising Costs and Product Prices

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  • Hal Varian

Abstract

How does a change in the cost of advertising affect product prices? On the one hand, advertising increases costs, but on the other hand, advertising is expected to generate more sales, so the impact on product prices and profits depends on the magnitude of these two effects. In this article I describe some recent trends in online and offline advertising and build a simple model of an online merchant. In this model when advertising becomes more costly, the merchant cuts back on ad spending, but it does not necessarily change product prices.

Suggested Citation

  • Hal Varian, 2022. "Advertising Costs and Product Prices," Journal of Law and Economics, University of Chicago Press, vol. 65(S2), pages 419-431.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/721269
    DOI: 10.1086/721269
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