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Advertising in the US Personal Computer Industry

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  • Michelle Sovinsky Goeree

    (Claremont McKenna College)

Abstract

Traditional models of consumer choice assume consumers are aware of all products for sale.This assumption is questionable, especially when applied to markets characterized by a high degree of change, such as the personal computer (PC) industry. I present an empirical discrete-choice model of limited information on the part of consumers, where advertising influences the set of products from which consumers choose to purchase. Multi-product firms choose prices and advertising in each medium to maximize their profits. I apply the model to the US PC market, in which advertising expenditures are over $2 billion annually. The estimation technique incorporates macro and micro data from three sources. Estimated median industry markups are 19% over production costs. The high industry markups are explained in part by the fact that consumers know only some of the products for sale.Indeed estimates from traditional consumer choice models predict median markups of one fourth this magnitude. I find that product-specific demand curves are biased towards being too elastic under traditional models of consumer choice. The estimates suggest that PC firms use advertising media to target high-income households, that there are returns to scope in group advertising, and that word-of-mouth or experience plays a role in informing consumers. The top firms engage in higher than average advertising and earn higher than average markups.

Suggested Citation

  • Michelle Sovinsky Goeree, 2005. "Advertising in the US Personal Computer Industry," Industrial Organization 0503002, EconWPA.
  • Handle: RePEc:wpa:wuwpio:0503002
    Note: Type of Document - pdf; pages: 73
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    References listed on IDEAS

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    Cited by:

    1. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.
    2. Sofronis Clerides & Pascal Courty, 2017. "Sales, Quantity Surcharge, and Consumer Inattention," The Review of Economics and Statistics, MIT Press, vol. 99(2), pages 357-370, May.
    3. María Moral & Jordi Jaumandreu, 2007. "Automobile demand, model cycle and age effects," Spanish Economic Review, Springer;Spanish Economic Association, vol. 9(3), pages 193-218, September.
    4. C. Robert Clark, 2003. "Advertising Restrictions and Competition in the Children's Breakfast Cereal Industry / Restrictions et compétition publicitaire dans l'industrie des céréales pour enfants," CIRANO Working Papers 2003s-30, CIRANO.
    5. Paola Manzini & Marco Mariotti, 2014. "Stochastic Choice and Consideration Sets," Econometrica, Econometric Society, vol. 82(3), pages 1153-1176, May.
    6. Alicia Barroso & Gerard Llobet, 2011. "Advertising and Consumer Awareness of New, Differentiated Products," Working Papers wp2011_1104, CEMFI.
    7. 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.
    8. Manzini, Paola & Mariotti, Marco, 2014. "Competing for Attention: Is the Showiest also the Best?," SIRE Discussion Papers 2014-015, Scottish Institute for Research in Economics (SIRE).
    9. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    10. Adam D. Rennhoff, 2004. "Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry," Food Marketing Policy Center Research Reports 084, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    11. Steven T. Berry & Philip A. Haile, 2014. "Identification in Differentiated Products Markets Using Market Level Data," Econometrica, Econometric Society, vol. 82, pages 1749-1797, September.
    12. Rennhoff, Adam D., 2004. "Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry," Research Reports 25155, University of Connecticut, Food Marketing Policy Center.
    13. Christou, C. & Vettas, N., 2008. "On informative advertising and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 92-112, January.
    14. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
    15. Wakamori, Naoki, 2015. "Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 499, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    16. Naoki Wakamori, 2011. "Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market," Staff Working Papers 11-27, Bank of Canada.
    17. Ken Hendricks & Alan Sorensen, 2006. "Information Spillovers in the Market for Recorded Music," NBER Working Papers 12263, National Bureau of Economic Research, Inc.
    18. Masatlioglu, Yusufcan & Nakajima, Daisuke, 2013. "Choice by iterative search," Theoretical Economics, Econometric Society, vol. 8(3), September.
    19. Liana Jacobi & Michelle Sovinsky, 2012. "Marijuana on main street: What if?," ECON - Working Papers 087, Department of Economics - University of Zurich.
    20. Hancock, Ruth & Henandez, Monica & Pudney, Stephen, 2004. "Participation in multiple welfare programmes: discrete choice with heterogeneous awareness," ISER Working Paper Series 2004-15, Institute for Social and Economic Research.
    21. Hernández-Mireles, C. & Fok, D., 2010. "Random Coefficient Logit Model for Large Datasets," ERIM Report Series Research in Management ERS-2010-021-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.

    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment

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