Economics and Advertising

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Submitted By ksay1fne
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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 of the advertising elasticity of demand (AED) to negative price elasticity (PED) (Feichtinger, 1992). According to Dorfman-Steiner, advertising intensity is great if the price-cost margin is high, thus intensity is explained by profitability. Concentration of industries also affect the level of advertising; unconcentrated industry firms where products are differentiated will advertise as long as it is profitable for them to do so. The relationship between concentration and advertising is roughly quadratic: intensity of advertising may rise with concentration levels, but decline once it reaches moderate levels (Martin, 1979).

The data for the graph has been gathered by calculating the number and size of advertisements of different firms on a particular day in the STAR Magazine followed by categorizing them under their respective industry and eventually market structure. After sorting the data according to their market concentration, we see an inverted U-shaped curve, which increases as market concentration increases but eventually drops after it reaches its peak.

The first market defined above, with zero concentration…...

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