Advertising affects consumer preferences and tastes, changes product attributes, and differentiates the product from competitive offerings.
Consumers become brand loyal and less price sensitive and perceive fewer substitutes for advertised brands.
Potential entrants must overcome established brand loyalty and spend relatively more on advertising.
Firms are insulated from market competition and potential rivals; concentration increases, leaving firms with more discretionary power.
Firms can charge higher prices and are not as likely to compete on quality or price dimensions. Innovation may be reduced.
High prices and excessive profits accrue to advertisers and give them even more incentive to advertise their products. Output is restricted compared with conditions of perfect competition.
Consumer buying behavior
Barriers to entry
Industry structure and market power
Advertising informs consumers about product attributes but does not change the way they value those attributes.
Consumers become more price sensitive and buy best "value." Only the relationship between price and quality affects elasticity for a given product.
Advertising makes entry possible for new brands because it can communicate product attributes to consumers.
Consumers can compare competitive offerings easily and competitive rivalry increases. Efficient firms remain, and as the inefficient leave, new entrants appear; the effect on concentration is ambiguous.
More informed consumers pressure firms to lower prices and improve quality; new entrants facilitate innovation.
Industry prices decrease. The effect on profits due to increased competition and increased efficiency is ambiguous.
Belch: Advertising and I VII. Special Topics and I 22. Evaluating the Social, I I © The McGraw-Hill
Promotion, Sixth Edition Perspectives Ethical, & Economic Companies, 2003
Aspects of Advtising & Promotion
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