This research broadens the base of economic models of advertising in three directions (described below), leading to a closer integration between the fields of Economics and Marketing.
The first part of the project is sub-titled "Advertising Attributes." This part traces the implications of assuming that advertising may enhance consumer valuation of product attributes. Under this approach, when a firm advertises an attribute (or "characteristic") of its product, this also raises the perceived quality of other rival products that have the attribute. This means that there can be positive spill-overs in advertising - a "Raise-all-boats" effect - for products with similar attributes. There are also the more traditional spill-overs from business stealing that come from advertising for products with dissimilar attributes. The extent to which advertising emphasizes attributes (and the matrix of product attributes in products) determines the net pattern of spill-overs. If advertising can be focused on particular attributes, then at most one firm will advertise any given attribute.
The second part of the project contributes to the "Economics of Attention." It addresses the problem that advertisers face of breaking through advertising clutter caused by other advertisers. The upshot can be a situation where firms must advertise heavily because others are doing so: they are "Shouting to be heard." However, the same market parameters can also be consistent with a much lower volume of advertising, and a broader range of message senders. In this context, an information intermediary (such as a television broadcaster) has an incentive to encourage a large volume of messages: a higher price yields less clutter (benefiting both ad recipients and even senders) but less profit to the intermediary. One result from the analysis of competitive pricing of information access is that a tax can be optimal to curtail excess message breadth and depth. This prescription needs to be adjusted if there is market competition among message senders within the same industry. Such competition can give equilibria with price dispersion and inter-industry spillovers (across the equilibrium price distributions) in competing for attention.
The third part, "Advertising: the Persuasion Game," frames the classic quality disclosure game squarely as a model of advertising - and so expands the rather limited stable of economic models of advertising - by introducing price and horizontal characteristics into the marketing decision. Two versions of the framework are considered, corresponding to different consumer behavior in different industries. If the consumer's product expectations are formed in advance of her visiting the store (as with headache medicine, for example), the corresponding "experience good" version of the model indicates that a larger degree of horizontal information should be imparted by low-quality firms. For a "search good," the consumer finds out about crucial dimensions only after visiting (for example, with airlines, the consumer must go to the web-site or telephone to find out when the flights leave). This analysis is more elaborate, and includes the decision of advertising price. It is shown that price is less likely to be advertised by high-quality firms.
Data from ads for airlines and analgesics ads on TV are analyzed to test conclusions drawn from the theoretical models.
