| Advertising affects consumer preferences and tastes, changes product attributes, and
differentiates the product from competitive offerings. |
Advertising |
Advertising informs consumers about product attributes and does not change the way
they value these attributes. |
| Consumers become brand loyal and less price sensitive, and perceive fewer substitutes
for advertised brands. |
Consumer Buying Behavior |
Consumers become more price sensitive and buy best "value." Only the
relationship between price and quality affects elasticity for a given product. |
| Potential entrants must overcome established brand loyalty and spend relatively more
on advertising. |
Barriers to Entry |
Advertising makes entry possible for new brands because it can communicate product
attributes to consumers. |
| Firms are insulated from market competition and potential rivals; concentration
increases, leaving firms with more discretionary power. |
Industry Structure and Market Power |
Consumers can compare competitive offerings easily and competitive rivalry is
increased. Effficient firms remain, and as the inefficient leave, new entrants appear; the
effect on concentration is ambiguous. |
| Firms can charge higher prices and are not as likely to compete on quality or price
dimensions. Innovation may be reduced. |
Market Conduct |
More informed consumers put pressure on firms to lower prices and improve quality.
Innovation is facilitated via new entrants. |
| High prices and excessive profits accrue to advertisers and give them even more
incentive to advertise their products. Output is restricted compared to conditions of
perfect competition. |
Market Performance |
Industry prices are decreased. The effect on profits due to increased competition and
increased efficiency is ambiguous. |
