Advertising

Advertising

• Advertising as Signaling - companies spend a lot of money on advertising to signal to the market that their product is of superior quality relative to the generic brands. This also ensures that the firm has an incentive to maintain its reputation and brand name by keeping the quality high. Examples:
• Bayer aspirin vs. generic aspirin
• Pepsi vs a "No Name" Cola
• McDonalds vs. a local burger joint

• Information - companies also justify spending on advertising because it allows them to provide consumers with information about their products. Example: New technology used in smartphones
• Irrational Consumer Response to Advertising - critics argue that consumers are not rational when they buy more of a specific product because they see celebrities endorse that brand. These critics feel that advertising does more harm than good because it rewards the companies that spend more on advertising rather than improving the quality of their products. Example: Kids buying expensive basketball shoes that are endorsed by a famous athlete even though they are not great shoes for performance.