Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol
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T.Y.B.A. Economics Paper - IV - Advanced Economic Theory (Eng)
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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 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. 2 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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