1. The Economics of Advertising
Anthony J. Pennings, PhD
New York University

2. 3 Roles of Advertising
• Persuasive
• Informative
• Complementary
• Informative?

3. What is Advertising?
Advertising informs the perception of
goods and services to influence
consumers and to reassure investors as
well as distributors and retailers

4. Advertising Industry Structure
• Advertising traditionally has been
dominated by four major conglomerate
holding companies:
– Omnicom and Interpublic of New York
– WPP of London
– Publicis of Paris
• These advertising groups account for
some 250,000 employees and own
subsidiaries spread among many
countries throughout the world

5. Advertising Industry Structure
• Google quickly became a powerhouse in the
advertising field reaching revenues of over
US$20 billion by 2010

6. Why Advertise?
Advertising is best seen within a context of
competing against other companies with
similar goods or services for sale. It is
useful for companies that may want to
increase competitive advantage in a
crowded market

7. Why Advertise?
The more competition in an environment, the more
the need to advertise?
O – market structure

8. John Kenneth Galbraith
• As a famous economist on modern industrial
society Galbraith pointed out the two major
reasons for advertising:
– Manipulate market demand
– Guard against sudden shifts in demand

9. MySpace vs. Facebook
Advertising or technological innovation?

10. Why Advertise
Determine what brands rather than what products
people will buy

11. Why Advertise?
Differentiate a product
Draw attention to brands

12. Why Advertise?
Brands as “symbolic thirds”?

13. Why Advertise?
• As a barrier to entry to gain competitive
advantage
• Impose high start-up costs on new
entrants
• Especially in a digital environment?
– No natural economies of scale to ward off
competitors

14. Why Advertise?
• Brand proliferation
• Pepsi One, Coke Zero