Economics, Brands and Advertising

This is a topic I've been diving into over the last couple of weeks.  I found, to my surprise, that a lot of research has been done on the economics of marketing.  This was surprising because I heard very little about the topic before I began searching.  Finding this literature is reassuring because it seems to me that advertising is a huge part of our everyday economic lives, and has a huge impact on the markets we study.  How can we pretend to understand markets without explaining the role of "marketing". 

 

By far the most helpful resource has been Kyle Bagwell's survey (pdf) of the advertising literature.  He presents the theory and empirical evidence along with a historical context so you can really see how the discussion has evolved over time and where it might be headed.

 

The questions are far from answered in this field.  We do know that advertising has an immediate effect on consumers.  Advertising increases a firm's sales.  The effect is easily testable, and if it were not true we would be very surprised to see so many companies wasting money for so many years.  But beyond this fact the empirical regularizes seem to stop.  Advertising does not seem to have a consistent effect across all industries, firms, and brands. 

 

To understand whether advertising is socially beneficial or harmful we need some theory that explains why it works.  For example, if advertising works because it changes a consumer's tastes and preferences it clearly not efficient from the point of view of society.  The resources used to produce advertising would be better off put to some other use.  On the other hand, if advertising provides customers with information at low cost, or it adds some extra value to consuming the product then these expenditures could actually be improving the general welfare.

 

After doing some very basic reading I can see why marketing is not on the tip of every economist's tongue.  First, advertising doesn't have an explanation that readily presents itself in economic theory.  Advertising does not have any purpose in a perfectly competitive market where there is no product differentiation, buyers are perfectly informed, and a firm and sell as much of the good as it can produce at the market price.  Second, of the competing theories that do exist, none of them appear to be valid on all situations. 

 

This is a fascinating topic and I plan to be posting about it on a regular basis. 

 

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