week 6: market power, structures + advertising Flashcards
Define market structure
Factors that determine the competitiveness of the market
The concept of competitive markets fails to explain: [3]
- why the number of firms differs across industries;
- why firms in different industries have different sizes;
- why profitabilities differ across industries.
product characteristics differ across markets …?
homogenous + heterogenous
- firms are involved in costly activities unrelated to production such as?
- advertising
- product differentiation
- r+d
- tech + product innovations
market conduct of firms is ______ + ______ __ _______ taken by buyers, rivals, suppliers n gov.
market conduct of firms is strategic + dependant on actions taken by buyers, rivals, suppliers n gov.
What are the 4 main market structures?
- PERFECT COMPETITION
- MONOPOLISTIC COMPETITION
- OLIGOPOLY
- MONOPOLY
Describe the characteristics of perfectly competitive markets?
- A large number of identical firms
- No barriers to entry/exit
- Homogenous products
- 0 long run profit
Describe the characteristics of monopolistic competition markets?
- Many firms
- Small/Moderate entry barriers
- Highly differentiated products
- Zero long run profit
Describe the characteristics of Oligopolies?
- A few big firms
- high entry barriers
- Homogenous and Heterogenous goods
- Positive long run profit
Describe the characteristics of Monopolies?
- One firm in the market
- Impassable entry barriers
- Absolute differentiation of products
- Very large LR profits
What is the SCP paradigm?
performance depends on the conduct of firms that in turn depends on market structure
Define ‘performance’
The success of an industry to provide benefits to society
Define Market Power
The ability of a firm to profitably raise the market price above marginal costs
Market power ______ as no. of competing firms increase
Decreases
Types of Entry/Exit barriers?
- Institutional and
- Economic (strategic+non strategic)
What are some institutional entry/exit barriers?
- licensing
- zoning
- patents
- tariffs
What are some non-strategic economic barriers?
- absolute cost advantage
- sunk costs
- scale economies
What are some strategic economic barriers?
- limit pricing
- advertising
- repuation
- collusion
- unionization
- price discrimination
- bundling+tying
- lock-in
- vertical integration
- networks
explain these barriers
USA spent how much on advertising in 2021?
USA spent 163bn dollars on advertising compared to 18.5 bn in the UK! USA had the highest spending
Define advertising
Advertising is a paid non-personal communication about an
organisation
*(or presentation of its goods and services) *
transmitted to a target audience through mass media (by an identified advertiser)
Under perfect competition, complete information, and fixed
preferences, should you advertise?
No. There is no purpose in advertising as firms sell as much as they can at the prevailing market price.
When did advertising start to really kick off?
At the beginning of the 20 c, scale economies, urbanisation, and
wealth accumulation led to large-scale production and
consumption.
When was the first economic analysis of ads?
Marshal (1980, 1919) and chamberlin (1933)
What are the three views on advertisements?
Persuasive View
Informative View
Complementary View
What is the persuasive view?
Ad alters consumers’ tastes and wants; it causes market power, entry-deterrence, brand loyalty, and spurious product differentiation
What is the informative view?
In the 1960s, economists (Ozga,1960; Stigler, 1961) suggested
that ad is a source of useful information for consumers.
Consumers lack information about prices, product characteristics, sellers, etc. Ad is a source of useful info that eliminates search costs.
What is the complementary view?
In 1977, Stigler and Becker suggested that ad is a good in itself.
Consumers derive utility from ads.
Ad is a good by itself, and thus, it is a component of a utility function. Ad is a complement to the advertised product, they are inseparable.
What is the effect on price of advertisements (Persuasive View)?
★ Advert lowers price elasticity of demand.
★ Ad is additional costs.
★ Prices go up.
Larger sales may lead to economies of scale and lower AC, but this effect is modest.
Anticompetitive - if two firms are in an advertisement war only one has expenditure reimbursed
What is the effect on price of advertisements (Informative View)?
★ Informative advertising eliminates search costs and *8expands demand**
IMRPOVES PED!!!!
★ It intensifies price competition and increases price elasticity of demand.
What is the effect on price of advertisements (Complementary View)?
★ Complementary ad increases the value of the advertised good.
★ An increase in the willingness to pay raises reservation prices and shifts the demand curve upward
What is the effect on competition by advertising? (Persuasive View)
★ Advertising is Anti-competitive
It softens price competition, creates entry barriers and brand loyalty, and intensifies product differentiation.
Ads cause market power.
What is the effect on competition by advertising? (Informative View)
Price advertising causes price undercutting and toughens competition
Advertised information expands demand by bringing more consumers and facilitates new entry.
What is the effect on competition by advertising? (Complementary View)
Usually anti-competitive. Consumers prefer the advertised good because its utility is amplified by ads.
What is the effect on welfare due to advertising? (Persuasive View)
Socially wasteful and excessive.
It doesn’t expand demand like the other two!
but redistributes market shares.
Combative ads lead to social losses and have no social benefit.
What is the effect on welfare due to advertising? (Informative View)
Socially beneficial
Consumers are better matched with the desired products and make informed choices. Lower prices and tougher competition improve efficiency.
What is the effect on welfare due to advertising? (Complementary View)
Ambiguous.
On the one hand, ad raises market prices and may reduce competition.
On the other hand,
Consumers obtain greater utility.
Ad improves social welfare if consumer surplus exceeds DWL.
Example of advertisement from Persuasive view?
Competitive and comparative ads, image and brand ads, and ads boosting business reputation (“reputational monopoly”) and consumer loyalty
Examples of advertisement from Informative view?
Advertising that informs consumers about prices, sellers, product characteristics, outlet locations, etc. A ban on price ads causes price collusion.
Examples of advertisement from Complementary view?
Ad that improves and amplifies a socioeconomic status for the advertised good (status goods, luxury goods,Veblen goods)
What is advertising intensity?
a share of advertising expenditures in the total revenue:
Formula for advertising intensity?
What does advertising intensity positively and negatively depend on?
Advertising intensity rises to an increase in the sensitivity of demand to
advertising
and decreases to an increase in the sensitivity of demand to price change
Companies spend more on advertising when ads effectively boost demand. They spend less on advertising when demand is highly affected by price changes instead.
Advertising function from Dorfman and Steiner 1954 does what?
Considers the conduct of a monopoly firm that uses advertising to stimulate sales.
What is Optimal Advertising A*?
In which markets is ad intensity higher in?
- Markets with differentiated goods. Experienced goods are advertised more intensely
- High in moderately concentrated markets
Economics predicts low/high ad intensities in which type of markets?
Low ad intensities in monopoly and perfect competition.
High ad intensity in oligopolies and monopolistic competition.
Top 15 advertising firms in 2022
Ad spending/total revenue in billions
Dorman production function has 3 elements, those are?
Total revenue: P*Q(P,A)
Production costs: TC(Q(P,A))
Spending on advertising: S(A)
Monopoly chooses ____ and ______- to maximise its profits
Monopoly chooses Price and Advertising to maximise its profits
Monopoly chooses ____ and ______- to maximise its profits
Monopoly chooses Price and Advertising to maximise its profits
How do firms know how much to advertise?
Advertise less when PED is higher
Advertise more when AED is higher
