1. Markets and Psychology

2. Overview of Lecture Empirical Work on Psychology in Markets Models

3. Truth In Advertising Nearly all work in advertising is: –Lab work –Empirical without experimental variation How much do we really know about impact of advertising? Why are there so few experiments?

4. Advertising What does advertising do? How are we to think about it in an economic model?

5. Pigouvian view “Under simple competition,there is no purpose in this advertisement, because, ex hypothesi, the market will take, at the market price, as much as any one small seller wants to sell.” What does this argument presume?

6. Historical Analysis Marshall –Constructive role: provides information to consumers. Help them to satisfy wants at lower cost –Combative role: Offers little information. Serves only to redistribute consumers from one to another Chamberlin: –Advertising is a selling cost –Shifts out demand curve for differentiated product

7. Three views Persuasive view –Changes tastes. –Creates brand loyalty. Makes demand curve less elastic –Why is change in slope necessary? –How does this interact with price competition? –Advertising causes higher prices

8. Informative View Conveys information What is the impact on a given advertiser? What is the impact on an industry as a whole? Advertising raises price elasticity Lowers price

9. Complementary view Provides true utility Enters customer utility function complementary to product consumption Examples? What impact on prices? Too little or too much advertising? What assumptions on competition?

10. Empirical Work How to test these ideas? Cross-Industry Tests –Correlate advertising with prices and profits –Results vary from study to study Problems?

11. Thought Experiment Suppose you could run an experiment for Campbell’s They’ll let you manipulate their advertising What would you try to manipulate? –Quantity –Target Audience –Content

12. Campbell’s Experiment Eastlack and Rao: –Perform such an experiment How would you choose the markets? How would you decide how many units to choose?

14. Measure What would you measure? What would you compare it to? How long?

24. Problems Statistical Issues?

25. Problems Statistical Issues? Small Samples for each experiment? –Why? Time Series Properties

26. Common Findings 48 AdTel experiments: –30% of weight tests produced results –47% of new copy produced results? Navy Enlistment Marketing Experiment –100% to +100% variation in advertising weight. No change –Local advertising had big impact Budweiser Experiments –No impact of weight

27. Psychology How to integrate this work with psychology? What kind of empirical work would facilitate integration? To use psychology need more control of details

28. Credit Card Experiment 246 Consumers of a credit card company Contact by telephone to encourage more utilization –Did not use the card for previous 3 months. Contact by letter as follow-up Two groups: –Cash users –Check users

29. Cash User Phone Script

30. Gain Frame

31. Gain/Loss Frame Results

32. Interpretations?

33. Varying Price Frames 86 stores randomly assigned to different pricing strategies Some items discounted regularly Some discounted in multiple units –Can always buy singly

35. Problems? How to resolve?

37. Interpretations?

38. Framing A different experiment. Can we frame the price in other ways? What about a price cut?

39. Framing Price Cuts

40. Predictions

44. Interpretations?

45. Varying Actual Consumption Package Size impact on consumption? –Anecdotal evidence: Pepsi –Successful launch of one-liter singIe-serving bottles of Pepsi and three-liter multi servingbottles of Coca-Cola Experiment: –Give out bleach –Give out laundry detergent –Use different sizes

46. Predictions?

47. Results

48. Interpretation

49. Location Key issue in supermarket –Where are products placed? Why might this matter? What elements of psychology relevant?

50. Two Key Changes Who gets more shelf space? –Base on recent sales Who to put next to who? –Complementary products –For ex: put toothbrushes next to toothpaste –When might this increase total sales?

55. Market Questions Implications for Market structure –What is impact on aggregate demand? –What is impact on price elasticity? –Curvilinear relationship? Are firms earning abnormal profits? What do these results imply for firm maximization? –Firms finding the best psychological levers?

57. Micro to Macro How can we profitably move from these micro-studies to more industry wide studies? Very very difficult

58. Overview of Lecture Empirical Work on Psychology in Markets Models

59. Mullainathan Shleifer Discussion

60. Gabaix-Laibson Discussion

61. Useful heuristic Decision vs. Hedonic utility?

62. Current Work Kamenica et. al. –Recall choice set results. What do they tell us?

63. Other Fundamental Issues Disclosure Choice platforms Firm responses to regulation