Sample Economics Essays on Advertising

Advertising

Advertising is a media used by business enterprises to attract more customers. When a firm decides to advertise there are several signals that it sends. For instance, it seeks to popularize its brand name. According to Wernerfelt (1990), umbrella branding that firms use particularly define either the location or quality of the product. Moreover, advertising uses the brand name as a way that consumers use to signal each other thus the ability to have a focal point when purchasing a product.

Moreover, the firm alerts potential customers about the existence, qualities, and prices of the commodities they offer (Milgrom &Roberts, 1986, p. 796). Advertising sends a signal to the potential customers on what it is offering during that period. Cantner, Hanusch, & Klepper, (2002) argues that, advertising is important when a firm introduces a new product or has changed prices.  Moreover, advertising signals the quality of a product. Customers use Price and advertising to infer the quality of a product. If a high quality firm cuts on any of these dimensions, low quality firms would easily mimic the signal thus customers would easily ignore the product (Milgrom, &Roberts, 1986, p. 799).

When advertising, firms make promises that refer to the quality and satisfaction from the product. Such promises would be made by indicating or highlighting previous users of the same product who got satisfactory results. In the food industry, numerous pictures or images show how tasty these foods are. Other promises made also refer to the durability, uniqueness as well as the cost effectiveness of these products. In case a firm fails to deliver all these promises made, the results are perilous. Lamb (2011) explains that customers purchase goods based on the promises given during advertising, in case they fail to get the expected results, they shift to the next big thing in the market (n.p).  They will look for a company that does not give them false promises. Moreover, failure to deliver these promises also breaks the trust customers had on the brand and the company and this thoroughly irritates customers. False advertising deems a brand unreliable and dishonest.   An example of an advertising scandal is L’Oreal company after they released an advert that featured two actresses in advertising their makeup products that terribly disappointed customers (Lamb, 2011, n.p).

Value creation is intended to create customers and to enable a business to attain an advantaged position compared to those of its competitors in the market (Besanko, Dranove, Shanley, & Schaefer, 2010, p. 365). On the other hand, competitive advantage occurs when a firm is in a market where entry is easy and the firms available provide essentially the same economic value. This makes competition between firms to dissipate profitably. The existing firms and the new entrants will compete by lowering their prices to the point where all the producers earn a zero profit. In such markets, consumers capture all the economic value of the product. According to Besanko, Dranove, Shanley, & Schaefer, (2010) for a firm to earn positive profit from an industry that would bring its profitability levels to zero, it has to create more economic value than its rivals (p. 372). The firm is then forced to develop a positive higher margin between the maximum willingness to buy of customer and the cost of the product which the rivals cannot copy.

The costs and benefits of creating competitive advantage include the following: the nature of the product limits the opportunities for enhancing its perceived benefits in goods such as chemicals and paper. In this case opportunities for creating additional value may come from lowering rather than increasing. However, the drivers of differentiation are much more than the physical attributes of the product and that opportunities may exist for differentiation through better post sale service, super location and more rapid delivery than competitors offer.

Moreover, consumers are relatively price sensitive therefore may not be willing to pay more for enhance product quality, performance or image. This particularly occurs when customers are more price sensitive than quality sensitive. Here value creation can only be developed and can be created through cost reductions than through benefits enhancements.

When the product is more of a search good than an experience good, the customer can observe the different offerings thus competitors can also imitate the enhancements. For this case, a firm can best create lasting competitive advantage by keeping its costs lower than those of its competitors and at the same time matching their initiatives in product enhancements. Typical consumers will pay significant price premium for attributes that enhance their benefits (maximum price willing to pay). It corresponds to the case in which the typical consumers’ indifference curve is relatively steep.

In addition, economies of scale or learning are significant and firms are already exploiting them. In this case opportunities for achieving cost advantage over these larger firms are limited and the best route toward value creation would be to offer a product that is especially well tailored to a particular niche’ of the market. In case the product is an experience good rather than a search good, benefit advantage could be based on image, reputation or credibility which is more difficult to imitate or neutralize than objective product features or performance characteristics.

The economic motivation in creating competitive advantage is basic business goal to maximize its profits. This is especially so when a business enterprise capitalize on increasing its market base and increasing its profits. Moreover the best way a business can increase its profits is by having a competitive advantage over its rivals thus customers give it higher preferences over the other available businesses.

References

Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2010). Economics of strategy (5th ed.). Hoboken, NJ: John Wiley & Sons.

Cantner, U., Hanusch, H., & Klepper, S. (2002). Economic Evolution, Learning, and Complexity. Heidelberg: Physica-Verlag HD.

Lamb, N. 2011. If you buy this product your life will better: The perils of brand promises. Xposure market brands.

Milgrom, P. &Roberts, J., (1986).  Price and advertising signals of product quality. Journal of political economy, 94 (4) 796- 799.

Wernerfelt, B. (1990) Advertising content when brand choice is a signal.  The Journal of business, 63 (1) 91-98.