Essay about Economics and Advertising

1156 Words Jul 10th, 2014 5 Pages
QUESTION 3:
According to Philip Kotler, advertising is about selling and advertising goals are to inform, influence and remind. In contemporary society, advertising is regarded as having two functions, persuading customers and informing them (Santilli, 1983)
According to Marcnerlove and Kenneth J. arrow (1962), the present and future demand of a product is affected by advertising expenditure and henceforth, the future revenue of the firm. Basic economic theory suggests that all firms are profit maximisers and in our analysis, we assume that firms only advertise when they have an incentive of getting better returns.
This is where we introduce the Dorfman-Steiner condition, which states that the advertising-to-sales ratio equals the ratio
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The demand elasticity for each firm’s output is infinite and the market faces a horizontal demand curve (Dorfman and Steiner, 1954). Hence, the ratio of AED to its PED is zero. The ratio of profit-maximising to advertising-to-sales is zero as the Lerner index is zero since price is equal to marginal cost. As the graph above shows, firms in PC do not advertise at all; provided that these firms do not need to advertise as they can sell any level of output at the current market price (Lipczynski et al., 2009). This is further supported by the observation that no firms under PC had advertisements in the magazine. Firm concentration in PC is really low (close to zero), so the consumers in this market move freely from one product to another as the products in this market are homogenous and do not require marketing.
Moving on, we classified industries such as tourism or firm’s producing fast moving consumer goods (FMCGs) under the category of near perfect market competition (NPC). This means that firms in these industries have slightly differentiated products and they use informative and persuasive advertising. Advertising in NPC is not done on a large scale; however it is a step forward in terms of doing advertising as the concentration ratio increases.
We also classified firms under monopolistic competition where concentration ratio is not as high as an oligopoly or monopoly, but it is still higher than PC and NPC. Firms that…

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