Week 8

Question 1

why do businesses seek information on consumer behaviour?

Answer 1

to predict market trends and improve strategic decision making

Question 2

what are the sources of data?

Answer 2

• the firms own information on how its sales have varied in the past with changes in determinants and demand eg consumer incomes and prices of competitors products
• market surveys: they can generate a large amount of cheap info. need to ensure however, that the sample of consumers investigated reflects target consumer group
• Market experiments involve investigating consumer behaviour within a controlled environment. This method is particularly useful when considering new products where information is scarce.

Question 3

what can a manager do with all the data?

Answer 3

attempt to estimate consumer demand using various statistical techniques eg regression analysis

Question 4

what implications comes from assuming that the factors that affect demand remain constant?

Answer 4

The estimation of the effects on demand of a change in a particular variable, such as price, depends upon the assumption that all other factors that influence demand remain constant. However, factors that influence the demand for a product are constantly changing, hence there will always be the possibility of error when estimating the impact of change.

Question 5

why isnt it enough to know what will happen to demand if a determinant changes?

Answer 5

firms will want to forecast the actual demand and what till happen, they can do this buy using methods like time-series analysis, barometric forecasting and econometric modelling

Question 6

what is time-series and barometric testing?

Answer 6

• Time-series analysis bases future trends on past events. the data can be decomposed into different elements: trends, seasonal fluctuations, cyclical fluctuations and random shocks.
• Barometric forecasting involves making predictions based upon changes in key leading indicators.

Question 7

what can a firm do if its estimated its demand function? what are the 2 issues?

Answer 7

If a firm has estimated its demand function (using econometric techniques), it can then feed into this model forecasts of changes in the various determinants of demand and use the model to predict the effect on demand.
The two main problems with this approach are: the reliability of the demand function (although this can be tested using econometric techniques)
and the reliability of forecasts of changes in the various determinants of demand.

Question 8

what should firms who seek to differentiate their products from competitors do?

Answer 8

When firms seek to differentiate their product from those of their competitors, they can adjust one or more of four dimensions of the product: its technical standards, its quality, its design characteristics and the level of customer service.
- Products can be vertically and horizontally differentiated from one another. Vertical differentiation is where products are superior or inferior to others. Horizontal differentiation is where products differ, but are of a similar quality.

Question 9

what are the four strategies that a market can choose from?

Answer 9

Four such strategies can be identified:
- market penetration (focusing on current product and market);
- product development (new product in current market);
-market development (current product in new markets);
- diversification (new products in new markets).
- The marketing strategy of a product involves the manipulation of four key variables: product, price, place and promotion. Every product has a distinct marketing mix. The marketing mix is likely to change over the product’s life cycle.

Question 10

what is advertising and its aims?

Answer 10

Advertising expenditure is cyclical, expanding and contracting with the upswings and downswings of the economy.
- Most advertising expenditure goes on consumables and durable goods.
-The aims of advertising are to increase demand and make the product less price elastic.

Question 11

what is a market niche?

Answer 11

a part of a market that has not been filled by an existing brand or business

Question 12

what are the two types of product policy decisions?

Answer 12

1. Product mix decisions - what range of products the firm should produce based on whether range gives:
   a) Cost complementarities - Eg economies of scope
   b) Demand interdependencies - E.g. goods sold together like garden tools or after-sales items
2. Product attribute decisions - what characteristics should each product embody and how should they be advertised.
   * Horizontal differentiation (characteristics)
   * Vertical differentiation (quality)

Question 13

what are credence goods or services?

Answer 13

they are goods and services for which it is difficult to evaluate
even after long-term experience of consumption.
* Utility may be related to perception (i.e. ‘faith’ in the
product)eg. Medical care, Education,
- they provide a Information asymmetry problem and reputation is highly important for such goods/services.

Question 14

what two things can advertising do?

Answer 14

A. Inform – objective information about the product attributes
* helps overcome consumers ‘bounded rationality’
* can reduce transactions costs
B. Persuade – manipulate consumers perceptions of the product
attributes (in the hope of reducing cross-price elasticity).

Question 15

why is advertising criticised?

Answer 15

Its ability to manipulate consumer wants (the alleged mechanisms through which advertising is held to work)
* Increasing the market power of firms which is harmful to welfare of consumer (see previous lectures).
* Wasting resources (if merely re-distributing sales)

Question 16

what is the impact of advertising on the demand curve?

Answer 16

1. Shifts curve out – i.e. more demanded at every price.
2. Reduces price elasticity (more upright curve) – i.e. increase potential price at each output (by making more unique good via brand identity)

Question 17

how can the effectiveness of advertising be measured?

Answer 17

AεD = Proportionate Change QD
Proportionate Change in Advertising
divide

Question 18

what does the effectiveness of advertising depend on?

Answer 18

A. Nature of Product
- Certain product characteristics respond more to advertising
{e.g. Difference between Search, Experience & Credence}
B. Opportunity for Product Differentiation
- The more products can be differentiated the more effective
advertising can be targeted

Question 19

what is the Dorfman-Steiner model?

Answer 19

Dorfman-Steiner model:
Variables:
A – is the advertising expenditure
PQ – is the revenue (i.e. Price * Quantity)
εA – is the price elasticity of advertising
εP – is the price elasticity of demand
where A is over PQ and eA is over eP
The nature of the product affects the effectiveness of advertising:
i.e. ‘search’ versus ‘experience’ goods, but also other goods
characteristics.

Question 20

what is search vs. experience goods?

Answer 20

• Search goods characteristics can be evaluated effectively before purchase.e.g. a stereo system, Consumers will optimally engage in
  more search for ‘high ticket’ consumer durables.
• Experience goods characteristics can only be effectively assessed through experience of consuming e.g. A new novel, CD or movie; bottle of wine

Question 21

how does frequency of purchase affect advertising?

Answer 21

-Generally - goods purchased very frequently would have LOW advertising intensities because low ɛA due to:
* Customer turnover is low.
* Also customer would be less likely to forget.
* Again, goods purchased only once (or very seldom) tend to have LOW advertising intensity
* Thus those in the middle will have the HIGHEST intensities!

Question 22

how does turnover affect advertising?

Answer 22

Stigler argues that the greater the turnover of customers in markets the HIGHER the level of INFORMATIONAL advertising (e.g. advertising nappies to new parents).
- However, advertising reach is subject to diminishing returns - as customer turnover increases relative to number of potential customers receiving the information,
- the optimal level of advertising will eventually decline.

Question 23

what are the other product differences that affect advertising?

Answer 23

4) Product Price
- Doyle Argues that relatively cheap goods don’t lead to much search activity, therefore, advertising will be
PERSUASIVE.
5) Difficulty in appraising goods
- Doyle argues if goods are difficult to appraise against alternatives (e.g. some technical consumer durables!), search activity has limited effectiveness so
PERSUASIVE advertising.
6) Product Innovation
* Markets which have a high degree of innovation have HIGH advertising intensity so as to keep the customer well informed, i.e. high ɛA. [This explains high advertising on
cars!

Question 24

when is advertising beneficial?

Answer 24

• There are many dispersed buyers
• The good is relatively cheap and simple
• The good is difficult to appraise objectively before purchase
• There are (frequent) repeat purchases (but not VERY)
• The goods are highly innovative (or changing)

Question 25

what is the relationship between seller concentration and advertising intensity?

Answer 25

So advertising intensity should rise with seller concentration, up to
oligopoly, then decline in monopoly (as no rivals), i.e. is an arc.

Question 26

what direct and indirect effect does advertising have on a firm?

Answer 26

1. Direct Effect
   * Increased share in the market
2. Indirect Effect
   * Fighting a price war with a new entrant will be more
   costly (more to lose if lower price on each unit sold)

Question 27

what is a source of non-price competition in an oligopoly?

Answer 27

In oligopoly there is little price competition, but a main source of non-price competition is advertising.
- A feature of advertising is there is a time lag in response.
- A price cut can be quickly matched by a rival, but mounting a
counter advertising campaign takes time.
- Schmalensee extended the Dorfman-Steiner conditions to include the effects of oligopolistic interaction.
- It is easy (and wasteful) for firms to be sucked into advertising wars, so will strategically avoid this.

Question 28

why does advertising act as a barrier to entry?

Answer 28

1. Economies of Scale
   * Favours the incumbent firms (lower costs than entrant) Can be (either or both) financial (e.g. getting preferential rates) or technical (e.g. more efficient use of advertising resources).
2. Accumulated stock of goodwill
   * May be a high capital cost barrier if firms have to overcome this
3. Build Brand Loyalty
   - New entrants must match this high level of advertising to capture any market share (penetration costs)
   - The incumbent has first mover advantage

Question 29

what are the advantages to branding?

Answer 29

1. Ability to charge a price premium.
2. Legal protection of any special features of the product.
3. Brand loyalty, lowering price elasticity of demand and
   weakening the power of wholesalers and distributors.
4. Assists with market segmentation and price discrimination.
5. May be linked to the firm’s overall corporate identity.

Question 30

what factors must be present for brand leadership?

Answer 30

Brand leadership’ - where customers see brand as distinctly superior.

Factors that must be present to achieve Brand leadership:
i. Brand must have certain intrinsic quality which is better than other brands (main factor)
ii. Advertising and promotion
iii. Good physical distribution

Barriers to entry enjoyed by first‑ movers can maintain advantage even post entry:
1. Pioneers have the advantage of greater consumer awareness
and acceptance gained through experience of the product.
2. Pioneers are perceived to have higher product quality
which in turn leads to higher market share.

Question 31

what is the link between advertising and branding?

Answer 31

Advertising is used to build up a brand name.
* Success means ‘market power’ and acts as a ‘barrier to entry’.

Brands also help to create market segments.
- Position product to get competitive advantage in a single Market segment. (i.e. ‘focus’ strategy - week 5)
- Firm can use a proliferation of brand names to create entry barriers.

Question 32

describe the practical ‘percentage of sales approach’ method?

Answer 32

. Percentage of Sales approach:
* Set budget as percentage of past or anticipated sales (e.g. 7-8%)
ADV:
- it is easy to use.
DISADV:
- However, what percentage is arbitrary (often ‘what was done before’)
- Use of past sales figures to determine the percentage is illogical. - - Using expected future sales figures is better but problems arise in predicting).
- New’ products may need more.

Question 33

describe the practical method of ‘all you can afford’ approach?

Answer 33

2. All-you-can afford approach: The firm spends up to the limit of its cash resources.
   ADV:
   - is a fixed ceiling on what will be spent.
   DISADV:
   - not necessarily correct to assume that this budget level will be the
   optimum i.e. attain ‘profit max’
   * Sometimes optimum to spend more than you can afford, i.e. borrow (to break into new markets or launch new products)
   * Sometimes less e.g. danger of extraneous spending which could start an advertising war.

Question 34

describe the practical method of ‘all you can afford’ approach?

Answer 34

2. All-you-can afford approach: The firm spends up to the limit of its cash resources.
   ADV:
   - is a fixed ceiling on what will be spent.
   DISADV:
   - not necessarily correct to assume that this budget level will be the
   optimum i.e. attain ‘profit max’
   * Sometimes optimum to spend more than you can afford, i.e. borrow (to break into new markets or launch new products)
   * Sometimes less e.g. danger of extraneous spending which could start an advertising war.

Question 35

describe the practical method of ‘competitive parity’ approach:

Answer 35

3. Competitive Parity approach:
   * Spend the same percentage of sales, or assets (or some such variable) as competitors
   ADV:
   - simple method, to maintain competition.
   DISADV:
   - differences between firms are ignored. E.g. small firms advertising at the same percentage as large firms may find its advertising inadequate.
   -Problem in estimating the relevant percentage if firms are diversified over several markets.
   * Can also lead to complacency (no motive to change).

Question 36

describe the practical method of ‘objective and task’ approach?

Answer 36

Objective and task approach:
In other methods, budget is determined before other aspects.

This method reverses the trend.
The firm:
a) Defines the objectives it wants from its advertising (e.g. geographical area)
b) Looks at the tasks required to achieve these objectives (e.g. 2 TV advertisements per week for 3 months)
c) Finally costs these tasks before arriving at the budget.

• Method is further improved by first looking at the cost- effectiveness of the original objectives.

Question 37

what are the advantages and disadvantages of the objective and task approach?

Answer 37

ADV:
* This method considers relevant aspects the trend
* Is strategically focused (i.e. objective first)
* Can be improved by firstly looking at the cost-effectiveness of the original objectives.
DISADV:
* Practical problems arise, e.g. have 2 advertisements for 3 months or 3 advertisements for 2 months.
* Effects of marginal increases/ decreases can’t be determined.

Question 38

what is informative and persuasive advertising?

Answer 38

Informative advertising has persuasive techniques, but relies more heavily on facts, whereas persuasive advertising seeks to appeal to consumer emotion to close the sale.
eg;
A. Market expansion effect (from informative advertising)
* “Soap is good for you” helps the whole soap industry and has an expansion effect
B. Market redistribution effect (from persuasive advertising)
* “Soap X is better for you” merely redistributes demand and is characteristic of
oligopolistic behaviour

Question 39

what do advertiser WANT to do with the demand curve?

Answer 39

shift the demand curve right: by increasing people desire for the product
2. make it price elastic: if advertising creates greater brand loyalty. People must be led to believe (rightly or wrongly) that competitors’ brands are inferior. This will allow the firm to raise its price above that of its rivals with no significant fall in sales. There will be only a small substitution effect of this price rise because consumers have been led to believe that there are no close substitutes

Question 40

What are the classifications of consumer good?

Answer 40

1. Producer goods: (B2B) are mainly search qualities,
2. Repeat purchase (short-term) experience goods, eg cereal high level of persuasive advertising (Davis)
3. Infrequent purchase (long-term) goods, where consumers engage in higher degree of search than cereals eg car (Davis)
4. Credence goods, highest levels of advertising
5. Search vs experience goods (Davis)

Question 41

Describe the price elasticity over the four stage of product life cycle?

Answer 41

Likely to rise through all four stages as more firms enger and offer substitutes products, consumers become more familiar with products and competitive offerings

Question 42

What is the advertising elasticity like in the product life cycle?

Answer 42

• advertising elasticity may be highest in the growth phase as firms establish differenced from rivals
• as consumers become more familiar advertising intensity lowers as impact of advertising becomes less eg kn maturity and decline

Question 43

What does the dorfman steiner model say about optimum advertising?

Answer 43

Suggests that advertising intensity should be equal to ratio of the advertising to price elasticity
- in early stages of life cycle, when price elasticity is small (inelastic) and advertising elasticity is high more advertising should be done
- as rivals enter, the response of rivals to any advertising by a firm would be expected to be more vigorous and in the abscence of an advertising war subgest lower advertising intensities

Question 44

How does Nelson distinguish between goods?

Answer 44

• Search goods (characteristics can be evaluated before purchase) – advertising tends to be informational.
• Experience goods (can only effectively assess after experience of consuming – advertising tends to be persuasive.
  He argues advertising will be higher for experience goods (only source of information and volume signals quality)
  •Also for frequently purchased, lower-priced and non-durable goods

•Credence goods evaluation is difficult even after purchase and may be affected by beliefs (e.g. medical services, vitamins etc.)

Question 45

How does Davis distinguish between the 4 types of consumer goods?

Answer 45

• Search goods - least intensively advertised as consumer searches
  •Goods where experience is of little value – e.g. new cars, consumer durables bought rarely
  •Short-term experience goods – e.g. foods consumer decides quickly if they like them and will buy again
  •Long-term experience goods - e.g. shampoo, cat food, require repeat purchase to evaluation, so will have the highest intensities as must persuade the consumer.