MICRO AND MACRO ECONOMIC IMPACT OF ADVERTISING

Economic impact of Advertising

An assessment of the role of advertising in the economic system offers the following benefits:

Advertising is a guide to prospective buyers — Information utility

Advertising influences primary and secondary demand for a product.

Advertising Stimulates product differentiation — Product utility

Advertising Stimulates introduction of new products — Encouraging innovation

Propensity to consume; and

Advertising Provides financial support to media.

MICRO LEVEL ECONOMIC INFLUENCE OF ADS

By providing a mix of information and persuasion, advertising impacts almost all phases of the decision
making process of the consumer.

It announces the existence of a new good, previously unknown and unnoticed by the general public. It
raises awareness and conveys information about new, possibly imported, goods.

Sometimes, it make easier to reach the good, e.g. by showing where it can be bought ("point of sales").
Usually a minority relegated to leaflets and billboards, certain advertising visual messages contain
reference to the price of the good. Their presence is used to press for a reference price that the
consumer will use to compare brands and retailers, if not even a immediate transaction (e.g. by mobile
commerce).

More significantly, advertising connects a good to a need, suggesting that by consuming the good the
need will be fulfilled. A common method is to link the good to the most fundamental and universal
needs, most deeply felt, whereas - without advertising - the good would be considered as of a much
narrower application and utility. Indeed many ads promise happiness to the buyer, much overstating the
reasonable effect of the product.

More radically, it has been argued that advertising revives latent need or even creates new needs, which
earlier were not felt. In so doing, advertising tend to raise an entire category of products to higher
ranking in terms of perceived needs.

However, consumer's bounded rationality usually restricts the number of brands that are remembered
in association to a category. Advertising is here extremely important since it places a specific brand in
the short list of consumer's mind. When asked to name brands of a certain category (e.g. soft drinks),
the consumer will promptly answer with the most advertised "known" brands he is aware of.

Advertising can address specific segments by highlighting a connection between their identity to the
product and the brand. Purchasing the goods becomes then a way to re-assure the consumer own
aspirational ego (e.g. "I'm a stylish woman, so..."). If this connection is widely known, the good might
become a "status symbol" used to send social messages (e.g. a very expensive item "talks" about the
wealth of the owner or of the purchaser).

Visual advertising will tend to provoke "recognition" of the product when displayed in the shop, whereas
word-based advertising will reinforce remembering the name of the brand, so that the consumer will
explicitly request it to the seller. The latter, when choosing the structure of its supply, which is a
cumulative bundle of all goods on the shelves, will tend to include all (or most) heavily advertised
brands, feeling confident to suggest them to the doubtful client. In all this, advertising reduces the
perceived risk for the buyer and for the seller.

In a more abstract direction, advertising does not only underline the benefits of a certain product but
also enrich a brand with symbolic values (e.g. anti-conformism, community belonging, security, etc.), so
that customers can enter in an empathic relationships with the brand, leading to positive attitudes for a
wide variety of products across different categories.

In a more practical orientation, since the actual purchase requires a "triggering occasion", where
attention is paid to satisfy a certain need or desire, advertising prompts first purchase by stimulating and
creating occasions. It highlights that "time has come" or that "a deadline is approaching" or "last units
are available", providing a stimulus for the purchase intention - an interior order to buy.

Advertising reveals the features of the good, on which the latter will be compared with other competing
products. It usually points to a "unique selling proposition", a key wedge against all other competitors.

In this way, advertising educates the consumer to pay attention to certain features or performances. In
particular, advertising tries to shift consumers' attention from weak to strong sides of the product and
modify the weights that consumer attributes to their importance.

To the extent the consumer adjust expectations on product performance based on his or her current
experience, she or he may well be "rather satisfied" of what routinely repurchase; advertising tries to
build a gap and justify bold new choices, raising the expectations for new goods.

For restyled and restaged existing products, advertising can lead to a new look at them, offering the
opportunity to a change in opinion.

One can note - in the content of some advertising - the bold attempt to radically negate a possible
objection to the product, exposing the exact opposite trait. Here the aim is to reduce psychological
barriers to the purchase, winning the interior battle that takes place in the consumer's mind. For
instance, an image of a very independent person could be used as testimonial for a product that creates
dependency (e.g. cigarettes).
In another perspective, advertising can be a public commitment of a "known" firm assuring that, against
its short-term interest, it uses the best ingredients, the most natural production processes, and so on.
More deeply, advertising can change the importance that consumer attaches to specific features of the
good, raising the corresponding "parameters" of choice.

If the good hasn't been already personally consumed, advertising can improve the perceived
performance of the good. It puts the product and its features in a better light, increasing the evaluation
of the consumer.

Advertising suggests uses of the good and place it in a certain category, which is the frame for consumer
choices and comparisons. A weak product in a category could be "diverted" into another, in which it has
some comparative advantages. Advertising can suggest new uses for a product and new occasions when
to consume it.

Although usually the experience in consumption is the moment where "truth" emerges and the
consumer can express its highly personal judgement, advertising can prepare and "frame" the
experience so that negative elements can be separated from the product and attributed to something
else. In this way, it modifies the way the experience is remembered and retrieved when making a new
choice and during further post purchase behaviours. Post-consumption exposure to advertising can
introduce fragments to the memory of experience, since "memory rewrites the past with current
information, updating your recollections with new experiences".

To modify experience is a tough task for advertising, but some comprehensive strategies can be
somewhat effective. It creates a social atmosphere that tend to block negative experience to be
communicated and circulated to others. A lie repeated thousands of times by thousands of people will
be considered as a truth.

More in general, advertising extends the social appreciation of the kind of behaviours related to the
good. It is particularly effective for situations in which the purchase has a social meaning ("I buy it so to
be praised and envied by others"), because it can act as a substitute for the "general opinion" of the
others.

In other words, advertising can give rise to a wave of reactions in social networks, so that, for instance,
friends who saw the advertising tend to suggest - when asked for advice - exactly that brand, thus
inducing imitation not only of real choices by others but also of their intentions and attitudes.

In another vein, advertising reinforces a positive attitude and sustains habits in purchasing. Advertising
reminds - to the already convinced consumer - the pleasure it brings, so stimulating re-purchasing. It
also enlarges the kind of occasions for consuming the good. In so doing, massive advertising of already
known firms is an entry barrier for new firms, even if they offer superior quality goods, which are simply
disregarded by indifferent consumer.

For certain routine purchases, advertising can even short-circuit the decision process by triggering an
automated response to the stimulus: the product is on the shelf, the consumer hand keeps it. The
connection is offered by a "trustworthy" brand, whose (heavily advertised) logo is what reduces the
complexity of multi-criteria choice to a simple gesture.
To be effective, advertising tend to be massively repeated over a number of media channels for certain
periods and repeated again over the years. Some elements (e.g. the slogan) tend to be a unified theme
across different versions of the ad spot.

Needless to say, some advertising can be so unskilful, badly carried out, and without enough budget, so
to result largely ineffective. Advertising - especially of new products - can have unexpected
consequences and many campaigns fail their targets.

Much depends on the very words, colours, emotions, and the media channels used in the advertising,
what opens a large field for the creativity of its authors. In some cases, advertising can be considered as
a new form of art.

MACRO LEVEL INFLUENCE OF ADS :

The main impact of advertising is on sale volumes. The second main aim of advertising is to differentiate
the products from competitors, reducing the relative degree of substitution, so to sustain a premium-
price over them, which in turn guarantee fairly high margins on costs, leading to high profits, provided
the quantity sold is large enough to justify the fixed discretionary costs of advertising.

More specifically to the industry business cycle, advertising speeds up the diffusion of new goods. It
prepares and accompanies the phase of take off, when "dominant design" defines the final form of a
good, as pointed out by J. M. Utterback.

In other terms, advertising can trigger the passage from large competition of very similar unbranded
products to a market where there is a clear leader (the top advertiser) and its imitators.

There may be a dynamic correlation between market shares and the "share of voice" (i.e. the share in
advertising expenditure): when there is a large discrepancy between the two, the share of voice might
lead to changes in market shares. This is appealing to challengers of current market leaders.

Large irreversible investments in plants couldn't be undertaken without the reasonable expectation of
wide sales, so that advertising has the task, together with other elements of the marketing mix, to
deliver them.

For mature products, advertising tries to stabilize sales at high values, counteracting seasonal falls and
preparing seasonal peaks.

In some countries, certain professional services where reputation is essential exhibit zero or low
advertising levels, because advertising is considered a cheap way to gain awareness and is condemned
by the profession. Word-of-mouth circulation of reputation is considered a better way to choose e.g. a
medical doctor or a lawyer. In this, there may be a hint that competition is not welcomed, either for
ethical reasons or because of fear of price competition among advertised professionals. Some would say
that the best advertising for a restaurant is the queue in front of it waiting to sit, not a billboard boasting
"high quality" dishes.

If consumers are prone to adjust their judgements upwards because of advertising, the incentive to
improve in-built quality is weakened and R&D will receive less budget.

Less real innovation can depend on an overemphasis on advertising, if the society is easily subjugated by
paid persuasion. Innovation efforts are then directed towards minor changes aimed at perceived-only
differentiation from the competitors.

If brand alone is the key of the decision, then the quality of the good is not important.

If, instead, people base their judgement on autonomous personal experience, advertising can trigger the
first purchase, but not repurchasing. If they are influenced by group belonging and social networks,
advertising and other's personal experience have a mixed role.

If consumers can judge inherent quality and if social networks effectively transmit these judgements,
advertising will fail if attempts to promote bad quality goods. Next, only goods of sufficient quality will
be advertised, mainly to activate first adoption, experience and the social networks. This, in turn, is
conducive to trust by people who cannot judge autonomously ("They wouldn't spend so much for
advertising, if they weren't sure of having a good product").

An effect of advertising, whose importance is growing, is on the trade channels. Producers of mass
consumption goods usually do not sell directly the product to each consumer but relies on retailers,
both small shops and large surfaces. With the latter raising in importance, the balance of power
between manufacturers and distribution is shifting towards the distributors, who sometime labels with
their own logo a vast array of goods, manufactured by now-anonymous firms. In so doing, retailers
increase their margins and control over product features.

Thanks to advertising, big producers can reach directly the consumer, making them aware of their own
brand, hoping that consumers will look for their products in the retailers POS (point of sales), badly
reacting to the lack of them. This forces retailers to supply branded goods, to avoid losing consumers in
favour to their competitors of other chains.

In short, advertising can strengthen the position of producers in front of retailers.

Conversely, large retailers can heavily advertise short periods of price cuts ("promotions"), leading to an
increased number of customers in their big-boxes or premises. This can be combined with a wide
presence of "private labels" where retailer's brand is put under a variety of items, in direct competition
with industrial brands. Since private labels do not have large ad-hoc advertising budget, they are
profitably sold by positioning them nearby the industrial national brands. For a spreadsheet model of
customers' choices in these cases, see here.

In the classical case of a well established incumbent oligopoly core challenged by new entrants with
radically different products, advertising can either be used by the former (to increase brand loyalty) or
by the latter (to highlight the new opportunities). The latter, however, often have invested most of their
discretionary spending in R&D to achieve the product innovation, so they are cash constraint and weak
in advertising. Banks could be reluctant to finance costly advertising campaigns for new products.

This is particularly relevant in the fields where climate change is requiring a host of technological
innovation but the structure of the sector hinders this "necessary" outcome. In this case,our book on
"Innovative Economic Policies for Climate Change Mitigation" puts forth the proposal of giving free
airtime to TV advertising of clean goods.

As an industry, advertising is a rich ecosystem of creative agencies, media centres and outlets, survey &
research companies and consultants. It represents a major source of income for radio and television
channels and the press, possibly making them more independent from government influence but
aligning them to business interests. The economics of advertising is a dynamic connection between
reasons to advertise and to supply advertising.

Finally, it should also be noted that there exist advertising campaigns that deliberately remove a direct
commercial aim, while rather improving the general image of a firm and its commitment to socially
approved values.