AEM 4550: Economics of Advertising Prof. Jura Liaukonyte
LECTURE 3: ADVERTISING ELASTICIES
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Plan of the Lecture Economics of Superbowl advertising Other
Elasticities Advertising Elasticity Measures of Market
Concentration Relationship between Advertising and Market
structure: Dorfman-Steiner Condition Optimal Advertising levels
Advertising to sales ratios across different industries Product
differentiation and Advertising
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Poll Everywhere At the beginning of each lecture you will be
presented with a keyword. Todays keyword is RABBIT To sign-in for
the day, text: Keyword netID to 37607 dont forget the space between
the keyword and netID Keyword is not case sensitive. Or, you can
sign in via a web browser at PollEv.com/dyson:PollEv.com/dyson Just
enter your netid For today: Text to 37607: RABBIT jl2545 Go online
to: PollEv.com/dyson jl2545 or
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Super Bowl Ads The 21 most-watched television programs in
American history are all Super Bowls Super Bowl 2015 delivered its
highest overnight TV rating ever 111.5MM viewers in 2014 114.5MM
viewers in 2015 Cost of exposure in 2015, $4.5 million for a
30-second spot Average CPM on TV for 2015 = $37.35. CPM Cost per
Mille - price an advertiser pays to reach a thousand viewers
Calculate CPM for a 2015 Superbowl ad = 4.5*1000/114.5 = $39.3
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Price Elasticity of Supply Measures the sensitivity of quantity
supplied given a change in price Measures the percentage change in
quantity supplied resulting from a 1 percent change in price
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Income Elasticity of Demand Measures how much quantity demanded
changes with a change in income DefinitionFormula Sign indicates
normal or inferior E I >0 implies normal good. E I
Size of shift in Demand E XY >1 E XY
HHI The Herfindahl-Hirschman Index the square of the percentage
market share of each firm summed over the largest 50 firms in the
industry (or all of the firms if there is less than 50) Definition
Properties Example In perfect competition, the HHI is small In
monopoly, the HHI is 10,000 (100 squared) A popular measure with
the Justice Dept in the 1980s HHI < 1000 characterized
competitive markets HHI > 1800 would bring Justice Dept
challenge to proposed mergers E.g. The cigarette industry is highly
concentrated with only 8 firms and a Herfindahl-Hirschman Index
(HH1) of 2623
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Example: Candy and Chocolate Industry
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Candy v. Chocolate HHI (for top 4)= 2941.81 Cr = 78.1% High
level of concentration HHI (for top 4) = 1141 CR = 59% Medium level
concentration ->Concentration is increasing! CANDY CHOCOLATE 518
Businesses overall!! 1,039 businesses overall !!
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CR and HHI: Candy Industry The HHI for just the top 4 companies
in the industry is 2941.81. The CR for the industry is 78.1%.
Therefore, the industry is highly concentrated with only a few
major firms holding a majority of the market share. CR = 49.5 +
21.6 + 4 + 3= 78.1% *Hershey and Mars Inc. alone hold 71.1% of the
market share. -Note that students calculated HHI incorrectly (need
to add squared market shares for top 50 companies, not only top
4)
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Example: Credit Card Industry
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All Credit Lending Institutions with their own card 27.2%J.P.
Morgan Chase & Co. 19.2% Bank of America Corporation 18.9%
Citigroup Inc. 17.2% American Express Company 4.0% Capital One CR4:
83.2 HHI: 1810-1850 Total Number of Companies: 192 Market
Definition
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What is a Market? No clear consensus the market for automobiles
should we include light trucks; pick-ups SUVs? the market for soft
drinks what are the competitors for Coca Cola and Pepsi? With whom
do McDonalds and Burger King compete? Presumably define a market by
closeness in substitutability of the commodities involved how close
is close? how homogeneous do commodities have to be?