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Industrial Economics - The Advertising Debate

by Andreas Lorek (Author) Carine Fernandez (Author) Bettina Schulte (Author) Antonia Havadi-Nagy (Author) Virginie Gauthier (Author)

Seminar Paper 2002 29 Pages

Economics - Industrial Economics

Excerpt

Table of Content

I The Advertising debate
I.1. What is Advertising?
I.2. Why should we advertise …
I.3. … and how much is useful?
I.4. Advertising in the market
I.5. How much has an enterprise to spend?
I.6. What are the different views of Advertising?
I.7. What are the consequences of Advertising?
a) on the market
b) on the product
I.8. Conclusion

II The French and German Advertising Market - an overview
II.1. Germany - one of the first members of Europe
II.2. Advertising and Society in Germany
II.3. Restrictions of the government
II.4. The Media Landscape
II.5. France - an important country in Europe
II.6. Socio-economic profile
II.7. Government’s restrictions
II.8. Advertising industry in France
II.9. The Media Landscape

III. The product Danone Actimel as example for different Advertising in Germany and France
III.1. Danone Group
III.2 France - home country of Danone
III.3. Danone GmbH - Danone in Germany
III.4. Actimel - one of the most successful products of functional food
III.5. Advertising for Danone Actimel
III.5.1. www.actimel.de - the German Internet presence
III.5.1.a. design and navigation
III.5.1.b. Content features
III.5.1.c. Conclusion
III.5.2. www.actimel.tm.fr - Actimel’s internet presence in France
III.5.2.a. design and navigation
III.5.2.b. content features
III.5.2.c. conclusion
III.5.3. www.actimel.dewww.actimel.tm.fr
III.5.4. an example for a French print advertisement
III.5.4. an example for a German television spot

Introduction

“Always Coca-Cola” who does not know this catch phrase? Advertising largely

influences the consumer behaviour. The aim of advertising is to push the consumer to buy and for companies it is a good way to increase their benefits and to have a well-known brand name. The advertising debate deals with the way of seeing advertising: as a mean of persuasion or as a mean of information?

At first, we would analyse the meaning of advertising within the advertising debate part. Moreover, we will focus on the French and German advertising market.

At last, we would compare, the different ways of Advertising in France and Germany of the product Danone Actimel.

Abbildung in dieser Leseprobe nicht enthalten

I The Advertising debate

I.1. What is Advertising?

There are different views: for some economists, it is a waste of money, for others, it is really important for the market economy.

Advertising is useful when the potential market is important. There are different kinds of advertising:

Abbildung in dieser Leseprobe nicht enthalten

The three goals of advertising are:

- to introduce a product on the market,
- to compare a product with another by highlighting this one,
- to inform the consumers.

Advertising is not the only way to promote a product; there are also other means as employing more salesmen, improving the packaging, extending the wholesale and increasing the margins. If you look at the table below, you can see that USA and UK are spending much more money on advertising than the other countries. media distribution of advertising expenditures in 1999 Advertising could be combined with other kind of promotion so it could be a substitute or a complement. According to Doffman, advertising could influence the position of firms demand curve.

I.2. Why should we advertise …

Advertising is useful when the product is not well known in order to inform consumers about quality, characteristics or to push them to buy a product and of course to increase the sell of the company. Advertising permits to attract new consumers, keeping old ones and to prevent the entry from other competitors.

There are two points of view about advertising. On the one hand, the industrial economists do not consider that advertising has an effect on the demand curve. But on the other hand, the neoclassical ones think that advertising is useful in order to maximise company profits.

I.3. … and how much is useful?

Advertising is much more common in industrialised countries due to their purchasing power. The expenditure on advertising depends on the type of goods; for example, firms spend much more money in advertising for consumers’ goods than industrial goods.

Moreover, concerning the consumer goods, a company spends more money on nondurable goods. A company could make more margins thanks to advertising because it is the cheaper mean to promote a product

The product and the market characteristics could influence the efficacy and the cost effectiveness of advertising. As the consumer goods market is huge and worldwide presence compared to the industrial goods market, which is smaller and more specific. So the firms spend more money in consumer one.

The consumer behaviour is different according to the kind of goods. For example, consumers do not pay attention to the information about non-durable goods but they need a lot of information concerning the durable goods. Moreover, for durable goods, the companies have to advertise more on the price than on the product itself.

According to Stigler, the concept of search explains that the consumer choice could be better when they could find information about the price, the availability and the quality of the product. There are different kinds of research like magazines, exhibitions, and phone enquiries. But the problem is: if the consumers collect too much information, he will not find the lower price.

If the consumers are searching hardly for a lower price when the firm will have to reduce its investment on advertising in order to get a more competitive price on the market.

For usual goods, consumers do not search a lot of information and satisfy themselves with advertising in part for unknown characteristic product.

Nelson divides the goods in two categories:

- search goods: goods that consumers could evaluate before purchasing (CDs)
- experience goods: goods that consumers could evaluate after purchasing (car servicing)

The role of advertising for search goods is to inform the consumers although concerning experience goods, the advertising role is to signal the presence.

According to Davis, for the consumer, advertising is a synonym of quality, so the company has to advertise a lot if they want that the consumers trust in them and therefore they could sell more.

According to Telser, some kinds of goods (baby milk) are volatile; that is why companies have to advertise heavily in order to inform the new consumers. A firm will also have to advertise a lot if its product characteristics could change rapidly or if it is on a market where they are a lot of new entrants.

To conclude, it is very important to advertise in order to inform and push consumers to buy.

I.4. Advertising in the market

There have to be different advertising levels because of the differences in market structures.

The optimal level of advertising depends on the market structure.

For example the level of advertising intensity in monopolies depend on the responsiveness of the customer to advertising messages and to changes in the product price. The goal in monopolies is that people buy more expensive products because of advertising. ( Dorfman and Steiner)

In Oligopolies the advertising intensity varies with the level of concentration. (Cable)

Reasons why in Oligopolies it is better to change the advertising intensity than the product price are:

- it does not have such an obvious threat to competitor market shares
- it is less obvious way to get market shares
- if rivals react it takes time till they receive benefits of advertising campaign.
- it can more easily be reversed without costumer complaining

The optimal advertising intensity depends in how rivals react (Cowling) e.g. the optimal amount of advertising is lower if rivals hold their price constant and moot their own campaign.

I.5. How much has an enterprise to spend?

The costs of advertising depend on the advertisement repetition and on the combination of the advertising media. Advertising threshold could be one reason why unit-advertising costs decrease. Threshold effect means that a certain amount of advertising has to be undertaken before any increase in sales is noted.

Once past this threshold advertising costs per unit output will fall. (Albian and Farris) Others disagree, suggesting that each time a message is repeated the number of new contacts made diminishes.

Increases in the expenditures in advertising can be coupled with changes in the type of advertising and one can also organise the advertising more effectively.

Advertising is most effective if there is either a big target group or a variety of advertising channels.

I.6. What are the different views of Advertising?

Focusing on different views of advertising, one distinguishes between the “Persuasion” and “Information” view.

The “advertising as persuasion” view was advanced by Bain in 1968, Comanor and Wilson in 1974.

By advertising goods, one hopes that consumers will be persuaded and will therefore tend to change their preferences in favour of the advertised product.

Promoting goods will cause that consumers get a distort view thinking that the advertised product will bring more benefit and satisfaction to them than other products.

The altered consumers’ behaviours concerning advertised goods and the fact that the consumers develop a brand-loyalty will effect that the demand of these particular goods becomes less sensitive to price changes. Another effect is the reduction of cross-elasticity between the demand of the advertised goods and its substitutes.

Besides, using advertising can build entry-barriers for new firms on a particular market, as consumers tend to stick to the advertised goods that they are familiar with.

The market structure will remain unconcentrated and the existing firms can offer their products at higher prices.

According to these advantages firms can achieve by using advertising, the rival firms who do not advertise or who are new in the market have either to heighten the advertising pressure or have to convince with substantial price discounts in order to face the firm who advertises.

The “advertising as information” view, which was advanced by Stigler in 1961, Telser in 1964 and Nelson in 1978 focuses on the aspect of given information in advertising. As the consumers have an imperfect knowledge concerning goods, advertising is used in order to provide information.

Looking at the point of view of consumers, they need to compare, distinguish and to be aware of other alternatives if they want make the best choice; Stigler even mentions that there is an optimal amount of knowledge for each product. Finally, the consumer benefit by buying the product that matches best.

By giving consumers information on an imperfect knowledge market, one will enable better purchase.

As the consumers are very conscious and concerned, especially focusing on the prices, the demand will get more price and cross-price elastic. This will cause that more and more firms are forced to offer more attractive prices.

Besides, advertising facilitates the entry for new firms, as they can inform and make their potential customers aware. The reduced entry barriers will increase concentration and competition, which is another reason why the prices will eventually decrease.

I.7. What are the consequences of Advertising?

Now we have seen the different views of Advertising. But the discussion between ‘advertising as persuasion’ and ‘advertising as information’ is not completely right. Advertising has different influences, mainly on the market and on the product.

a) on the market

Earlier models of advertising have been too simple. They didn’t explain the role of advertising for the middlemen, the retailers. If the factory that produces the goods does not do any advertising, the products will become, as Steiner argues, very close substitutes. So the retailer has the chance to choose which brands he wants to stock. And of course the retailers will choose the products with the highest margins for him. The competition between retailers is not that big and no brand will have high market concentration because there are many alternatives. But in this model the costs for distribution might be higher because the retailer has to provide information about the product to the consumer.

When the producers begin to advertise for their products they will gain a better position with the retailers. Now the customers who have seen the advertising expect to find the brands in the shops. If the retailers fail to stock these brands in the shops they risk to loose margins to their concurrence. But with advertised brands the retailers have smaller margins than with other goods. And now retailers are also under pressure to make good prices for the advertised goods, because consumers know the different prices and can choose between different retailers. An analysis from about 1000 product lines comes to the following conclusion:

“The product groups which received very high advertising support by their respective manufacturers were quite obviously those on which the retailer levied the smallest margins” (The Advertising Debate, page 75).

The effects of advertising depend on how the market develops. The prices for the consumers will be higher because of the higher market power of the manufacturers and the higher costs for advertising. For new firms it is more difficult to entry the market because the need a lot of money for advertising to gain a market share.

Normally there is a co-existence of advertised brands and retailers’ private labels. The cheaper prices of the retailers ‘own brands’ causes pressure for the manufacturers, but they have in the opposite market power because of their advertising. They are dependent on each other, their relationship is important for the market.

The influence of market concentration caused by advertising is not clear. There are some studies with different results. The ‘advertising as persuasion’ view implicates a positive relationship on the market share, but with the view of ‘advertising as information’ there can be either a positive or a negative relationship. With the introduction of television for advertising there is a new and economical way to reach a lot of consumers. This allows getting market share “at the expense of incumbents” (The Advertising Debate, page 76).

Another explanation between advertising and concentration means that there are different influences at the same time. So the level of advertising influences of course the market concentration, but the presence and power on the market influences at the same time the level of advertising.

Another theory is, that advertising creates a higher stability of the market shares of the leading firms. “If high advertising intensively creates entry barriers, market shares should be more stable” (The Advertising Debate, page 76) is mentioned in the text.

But the first test of this idea by Telser in 1964 found out, that in markets with a high intensity of advertising the market shares are less stable. Results of another test are saying, that advertising raises competition, so “high advertising intensity did not promote greater stability of market share” (The Advertising Debate, page 76). After a ban of advertising for cigarettes in the USA he found out, that the market shares were more stable without advertising. And for about four years there were no new entries of firms in the market.

With these results the theory of market caused by advertising is not right.

b) on the product

A big discussion is the influence of advertising on the profit, as well. Some studies think that advertising makes a stock of goodwill for the product, which disappears after a time. With this view there might be a very strong relationship between advertising and profits. There is an example that the effects of a big advertising campaign for a low-priced and frequently purchased product are dissipated within six to nine months.

The correlation between advertising and profits is not clear. Is the high intensity of advertising a result of the higher profits or are the high profits a result of big advertising? Albion and Farris found in a study a positive relationship, although it is the question if profitable industries advertise more or advertising increases industry profits.

As mentioned before there are no higher entry barriers in markets with a high advertising intensity. Advertising can be a simple way for new entrants to get into the market. In an example of the UK, where advertising was permitted in 1985, new entrants used a lot of ways to promote their products. The complemented the advertising with free gifts, free trial periods or other promotional actions.

Some studies have the results, that advertising makes it harder to entry the market. A study suggests, “US manufacturing industries with high advertising-sales ratios have significantly lower entry rates” (The Advertising Debate, page 78). A more complex picture is that from the UK car industry after 1968. Advertising fostered competition and new entrants, but continuously advertising makes it than harder for later entrants. As a conclusion you can say that advertising inhibits some new entrants because it is extremely expensive to enter in a market with a high advertising intensity.

Another different and important question is the influence on advertising on the prices. The studies about this aren’t completely right, because totally correct there must be the advertising costs plus the associated transaction costs. Important is how the price would be, if there was no advertising. Advertising can have different influences on different markets. For example Rizzo and Zeckhauser examined in 1992 the influence on Advertising on the physicians market. First it seems that advertising lowers the prices but actually the physicians wanted to get more patients with advertising. So they argued, that “Advertising actually leads to higher prices, higher quality services and fewer patient visits” (The Advertising Debate, page 79).

An opposite effect was seen at the market of toys. The margins of Canadian retailers on Christmas 1972 were an average of 20.2 per cent by advertised toys and 46.1 per cent for toys that were not promoted on television. Another study proved that lawyers who advertised always charged lower fess than their colleagues without advertising.

Some states of the USA permitted advertising for eyeglasses. A comparison between states that allowed advertising and the other states showed, that in states with advertising the eyeglasses were cheaper. When advertising for opticians were allowed in the UK in 1985 prices fell by about 20-25 per cent in the following year. A comparison between different countries shows that in states with advertising standard spectacles are significantly cheaper.

It is right that advertising ‘must be paid for’ but on the other hand it is possible to lower other costs, for example search costs. And with advertising consumers are able to purchase at cheaper outlets and to travel to other stores with better prices.

I.8. Conclusion

There is no doubt that advertising has effects on the market. The question is if these effects are positive. The two views ‘advertising as persuasion’ and ‘advertising as information’ leads to different conclusions. People who privilege the persuasion view argue that advertising leads to higher prices and increased market power. The others see advertising as an informative factor, which reduces search costs and makes consumers more responsive to differences in prices.

Both views are correct, there isn’t only one kind of advertising. The biggest influence of advertising is probably on non-durable, low-priced goods, because for this products people don’t research much. They go to the shops and buy what they know; these decisions might be made on the basis of advertising. Advertising leads in most cases to higher concentration on the market and that means for customers lower prices. “In fact, the few studies that have analysed the impact of advertising on retail prices have generally found the effects of advertising to be beneficial” (The Advertising Debate, page 82).

[...]

Details

Pages
29
Year
2002
ISBN (eBook)
9783638246705
File size
1.5 MB
Language
English
Catalog Number
v20912
Institution / College
Hogeschool Zeeland – Commercial Economics
Grade
8/10
Tags
Industrial Economics Advertising Debate

Authors

  • Author: Andreas Lorek

    Andreas Lorek (Author)

    12 titles published

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    Carine Fernandez (Author)

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    Bettina Schulte (Author)

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    Antonia Havadi-Nagy (Author)

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    Virginie Gauthier (Author)

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Title: Industrial Economics - The Advertising Debate