INFORMATIVE ADVERTISING
Moving on with the case, Sir Dickey Beardson has to consider the future of Phony, the other subsidiary of WHORE. Beardson reckons that informative advertising suits these products best for reasons that will be discussed in this section. After reading this page, you should have an understanding of the basic principles of informative advertising, its effect on the demand curve and price elasticity and hopefully be able to recognize the difference between persuasive and informative advertising.
THE SITUATION
Again, let us assume the following: Phony, a relatively low-cost firm but with high quality, innovative products had just created its new line of goods which contained the latest technological advances in the camera and digital photography industry; a monopolistic competition industry with many players but non-identical products. These products are characterised as experienced goods and, more precisely, as shopping goods because they are high-priced goods that are not purchased frequently and thus consumers are unable to test the quality of the products by sampling (Dukes 2008). Phony was the market leader in Japan but fourth in the global camera market. Beardson, an ambitious man, believed in the potential of his new products. His goal was to become second in the global market in the next two years. In order to achieve that Beardson knew that informative advertising was the key to his 2013 advertising campaign.
THE THEORY
In order to understand why informative advertising is the best choice for Phony products, we need to analyze its characteristics. Firstly, by definition, informative advertising provides consumers with factual information about product attributes. Since Beardson wanted to launch new, complex products, alien to current consumers, it was imperative that they be introduced and presented with their core attributes and characteristics highlighted. Secondly, Beardson also wanted to stimulate primary demand for these products, increase the overall demand for his company’s products by targeting and informing new customers that had never purchased similar products before and thereby increase his share. He was confident about his products’ attributes and wanted to communicate them to potential customers by educating and informing them. By following this approach, he aimed to add credibility and instill confidence (in the eyes of the customers) toward his company and to its new products.
Additionally, Beardson was aware of the fact that informative advertising has the power to facilitate entry of new products by existing firms (Bagwell 2001). Because advertising can be an efficient source of information about product quality, unique product features and low prices, advertising can facilitate entry by allowing entrants to quickly inform customers about their new products and thus avoid slower, more costly, 'experience-based diffusion' of information (Dukes 2008). Lastly, since we are referring to Phony cameras as shopping goods, we can conclude that advertising that provides valid information about the products will be rather useful for potential consumers (Dukes 2008).
Again, let us assume the following: Phony, a relatively low-cost firm but with high quality, innovative products had just created its new line of goods which contained the latest technological advances in the camera and digital photography industry; a monopolistic competition industry with many players but non-identical products. These products are characterised as experienced goods and, more precisely, as shopping goods because they are high-priced goods that are not purchased frequently and thus consumers are unable to test the quality of the products by sampling (Dukes 2008). Phony was the market leader in Japan but fourth in the global camera market. Beardson, an ambitious man, believed in the potential of his new products. His goal was to become second in the global market in the next two years. In order to achieve that Beardson knew that informative advertising was the key to his 2013 advertising campaign.
THE THEORY
In order to understand why informative advertising is the best choice for Phony products, we need to analyze its characteristics. Firstly, by definition, informative advertising provides consumers with factual information about product attributes. Since Beardson wanted to launch new, complex products, alien to current consumers, it was imperative that they be introduced and presented with their core attributes and characteristics highlighted. Secondly, Beardson also wanted to stimulate primary demand for these products, increase the overall demand for his company’s products by targeting and informing new customers that had never purchased similar products before and thereby increase his share. He was confident about his products’ attributes and wanted to communicate them to potential customers by educating and informing them. By following this approach, he aimed to add credibility and instill confidence (in the eyes of the customers) toward his company and to its new products.
Additionally, Beardson was aware of the fact that informative advertising has the power to facilitate entry of new products by existing firms (Bagwell 2001). Because advertising can be an efficient source of information about product quality, unique product features and low prices, advertising can facilitate entry by allowing entrants to quickly inform customers about their new products and thus avoid slower, more costly, 'experience-based diffusion' of information (Dukes 2008). Lastly, since we are referring to Phony cameras as shopping goods, we can conclude that advertising that provides valid information about the products will be rather useful for potential consumers (Dukes 2008).
dsf
THE ECONOMIC EFFECTS
Let us now illustrate Beardson’s advertising goals and their economic effects. Figure 2 shows the demand curve for Phony cameras in 2012 (D1) that we also saw in Figure 1. If the 2013 campaign is successful then more consumers will be informed about the new Phony products, including customers that have never purchased such a camera before. This will result in a shift of the demand curve to the right, from D1 to D2. The price at this point remains the same. As Bagwell states in his paper- The economics of advertising, "the informative view holds that advertising primarily affects demand by conveying information and thus the advertised product faces a more elastic demand", meaning that demand for a product becomes more sensitive to price changes and less steep than the initial demand curve. Subsequently, the prices for the new products will decrease from point b to point c on the demand curve D2, an inevitable action consistent with large economies of scale of firms that use informative advertising. This also shows that informative advertising promotes competition among the existing firms (Bagwell 2001). Due to reasons previously stated, sales of this product should increase. From the aforementioned explanation we can conclude that the increased demand that informative advertising caused usually happens to low-cost firms with high quality products, such as Phony, and such firms are also attracted to demand expansion achieved by offering low prices and high quality products (Bagwell 2001).
Let us now illustrate Beardson’s advertising goals and their economic effects. Figure 2 shows the demand curve for Phony cameras in 2012 (D1) that we also saw in Figure 1. If the 2013 campaign is successful then more consumers will be informed about the new Phony products, including customers that have never purchased such a camera before. This will result in a shift of the demand curve to the right, from D1 to D2. The price at this point remains the same. As Bagwell states in his paper- The economics of advertising, "the informative view holds that advertising primarily affects demand by conveying information and thus the advertised product faces a more elastic demand", meaning that demand for a product becomes more sensitive to price changes and less steep than the initial demand curve. Subsequently, the prices for the new products will decrease from point b to point c on the demand curve D2, an inevitable action consistent with large economies of scale of firms that use informative advertising. This also shows that informative advertising promotes competition among the existing firms (Bagwell 2001). Due to reasons previously stated, sales of this product should increase. From the aforementioned explanation we can conclude that the increased demand that informative advertising caused usually happens to low-cost firms with high quality products, such as Phony, and such firms are also attracted to demand expansion achieved by offering low prices and high quality products (Bagwell 2001).
CONCLUSIONS
As you saw, informative advertising has the following attributes:
Note:
A key difference between informative and persuasive advertising is that, with informative advertising, a consumer’s knowledge of the product (existence, price, where to buy, etc.) is updated upon seeing the advertisement, while the consumer’s fundamental preferences remain unchanged. In contrast, a persuasive advertisement affects a consumer’s preference for the product (Dukes 2008).
- It contains direct information as to the existence, location, function or price of a product.
- It can increase a product's demand by shifting the demand curve to the right
- It promotes competition among existing firms and results in lower prices and high quality products
- It has the power to facilitate entry of new products by existing firms
Note:
A key difference between informative and persuasive advertising is that, with informative advertising, a consumer’s knowledge of the product (existence, price, where to buy, etc.) is updated upon seeing the advertisement, while the consumer’s fundamental preferences remain unchanged. In contrast, a persuasive advertisement affects a consumer’s preference for the product (Dukes 2008).
REFERENCES
- Hamilton, St. (2009) "Informative advertising in differentiated oligopoly markets", (Online), Available from: http://digitalcommons.calpoly.edu/cgi/viewcontent.cgi?article=1001&context=econ_fac&sei-redir=1&referer=http%3A%2F%2Fwww.google.com%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Dinformative%2520advertising%2520provides%2520consumers%2520with%2520factual%2520information%2520about%2520the%2520product%2520attributes%26source%3Dweb%26cd%3D1%26ved%3D0CDMQFjAA%26url%3Dhttp%253A%252F%252Fdigitalcommons.calpoly.edu%252Fcgi%252Fviewcontent.cgi%253Farticle%253D1001%2526context%253Decon_fac%26ei%3DUQbfUMjZMuqL4gTZ5oCgDw%26usg%3DAFQjCNFSV7r7fVg30a7Jf-wVzpLace8ftg%26sig2%3DGvncx5bh21K_KzDkG0jK2g%26bvm%3Dbv.1355534169%2Cd.bGE#search=%22informative%20advertising%20provides%20consumers%20factual%20information%20about%20product%20attributes%22 [Accessed 29 December 2012].
- Bagwell, K. (2001) "The Economics of Advertising, Introduction" (Online), Available from: http://www.stanford.edu/~kbagwell/Bagwell_Web/advertisingintrofv2.pdf [Accessed 29 December 2012].
- Dukes, A.J. (2008) "Advertising and Competition" (Online), Available from: http://www-bcf.usc.edu/~dukes/Papers/Vol%20%20IChap%20%2022CompetitionLaw_m1.pdf [Accessed 29 December 2012].