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Industrial Organisation 2022

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Question:

What model can be used to examine the effect of informative advertising (consumer gain) ?

Author: Hjalmer Pedersen



Answer:

Notation: MC: constant cost to the consumer by searching product information for another hour MB1: The prize for the consumer by searching product information for another hour without advertising Model implications: • The consumer will seek information until MB1=MC => s1 search time. • MB2: The prize for the consumer by searching product information for another hour with advertising  The consumer will seek information until MB2=MC => s2. • Notice at s2 < s2, i.e. advertisement reduce consumer search costs.


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Notation:
MC: constant cost to the consumer by searching product information for another hour
MB1: The prize for the consumer by searching product information for another hour without advertising

Model implications:
•	The consumer will seek information until MB1=MC => s1 search time.
•	MB2: The prize for the consumer by searching product information for another hour with advertising  The consumer will seek information until MB2=MC => s2.
•	Notice at s2 < s2, i.e. advertisement reduce consumer search costs.
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