Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

7.2.3 Search and Advertising 
Even though most advertising contains an important 
manipulative component, it also provides a great deal of useful 
information to consumers on the availability of products, their use 
and properties, the firms selling particular products, retail outlets 
that carry the product, and product prices. Thus, advertising greatly 
reduces consumers‘ search costs. In most cases, it also reduces 

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both price dispersion and average prices. Clearly, advertising often 
results in increased competition among sellers and lower product 
prices, and it provides very useful information to consumers. 
In examining the role of advertising, Philip Nelson 
distinguishes between search goods and experience goods.
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Search goods are those goods whose quality can be evaluated by 
inspection at the time of purchase. Examples of search goods are 
fresh fruits and vegetables, clothes, and greeting cards. 
Experience goods, on the other hand, are those which cannot be 
judged by inspection at the time of purchase but only after using 
them. Examples of experience goods are automobiles, LCD, 
Laptops, canned foods and laundry detergents. Some goods, of 
course are borderline. For example, the content of a book or 
magazine can be partially gathered by quick inspection at the 
bookstore before purchasing it. But its quality can be fully evaluated 
after reading it more carefully after the purchase. 
Nelson points out that the advertisements of search goods 
must by necessity contain large information content. Any attempt 
on the part of the seller to misrepresent the product in any way 
would be easily detected by potential buyers before the purchase 
and would thus be self-detecting. The situation is different for 
experience goods, where the buyer cannot determine the true 
properties of the product before use. Nevertheless, the very fact 
that a large and established seller is willing to spend a great deal 
on advertising the product provides indirect support for the seller‘s 
claims. After all, a large seller that has been in business for a long 
time must have enjoyed repeated purchases from other satisfied 
customers.
In 2005, about $276 billion was spent on advertising in the 
United States, of which 20.5 percent was on direct mail, 17.4 
percent in newspapers, 16.4 percent in broadcast TV, 8.9 percent 
on cable TV, 7.2 percent on radio, 5.2 percent on Yellow Pages, 
4.7 percent on magazines, 2.9 percent on the Internet, and the rest 
in other forms of advertising. Newspaper advertising was found to 
be the most informative, while TV advertising was found to be the 
least informative among major forms of advertising. Another study 
found that industries with higher with higher-than-average 
advertising expenditure relative to sales had lower rates of price 
increases and higher rates of output increases than the average for 
150 major industries. From this, it can be inferred that advertising 
has a large informational content. 

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