The Economics of Advertising by W. Duncan Reekie (auth.)

By W. Duncan Reekie (auth.)

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2): sensitivity of consumers to quality variation (8qj8x); sensitivity of consumers to price variation (8qj8p); sensitivity of average production costs to quality variation (8cj8x). If we now make the following, not implausible, assumptions: after x reaches a certain level 'lc declines; after x reaches a certain level the average manufacturing cost of achieving an extra increment of quality rises. The following inferences can be drawn: (a) The quality of product offered to a market tends to be higher the more sensitive consumers are to quality changes.

Why do the functions have the shapes shown? It is plausible to assume that the effectiveness of advertising increases at first but ultimately will display diminishing returns (see Figure 4-4 ). The shapes of '1 are more difficult to justify. l(c). ,11 11 11 (a) (b) FIGURE 4·1 (c) The Dorfman-Steiner model Figure 4·1(a) can be applied to a perfect market. '1 is (infinitely) above J1 and the profit maximising advertising level is zero (Jl ~ '1 if s = 0). Figure 4·1(b) represents that type of oligopoly with differentiated products where product differences are real and important to the consumer but are intangible in kind.

Clearly no industrialist will willingly assume the costs of preventing river pollution because this would make him less profitable than his rivals who did not adopt such measures. No motorist will go to the expense of rendering his car exhaust fumes pollution free, since environmental improvement will be miniscule if his fellow motorists do not follow suit. No advertiser will refrain from using bill hoardings, which, if rivals did not do likewise, would almost certainly result in lower sales. The problem of visual offensiveness is merely a variant of the familiar problem of external costs.

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