I am sorry, but what other options are there? The advertising costs are paid out of interest on the firm’s bank balances? Out of tax subsidies? Out of charity donations?
Out of the firm’s profits.
The firm’s costs are paid out of the firm’s revenues. If the firm’s revenues come from selling things to consumers, the consumers are paying for the firm’s costs—all of them
Yes, this is true, in a sense. But it says nothing about what changes when one of these costs change. If the cost of office space increases, does that raise prices for consumers, or does it mean the firm has less to spend on golf club membership, or a mixture, or what?
Consider the toy example I gave above when I’m selling Coke to Alan and Bob—if you recall, I set the price at £2 per litre, and am making £1.90 in profit. Now suppose I start spending £1 in advertising. Do I raise the price to £3? Nope; I already set my price at the level that would maximise my revenues. It just means my profits are now only 90p.
Regarding substitutability: yes, Coke and Pepsi are partial substitutes, and electronic goods are not completely commodities. But Colas are much less substitutable than Samsung and HTC, or Dell and HP. The question is one of degree.
So try a model where all cola costs 10p a litre to produce, Alan values Coke and Pepsi equally at £3 a litre, Bob and Chris value Coke at £3 a litre, Pepsi at £1 a litre, and Dave and Edward value Coke at £1 a litre, Pepsi at £3 a litre. In equilibrium, how much will Coke sell for? How much will Pepsi sell for? Now suppose Coke and Pepsi each spend £1 on advertising. How much will Coke sell for? How much will Pepsi sell for?
Advertising is basically buying market share. I would argue that we see most advertising in highly competitive markets where you can buy market share. That means that you can differentiate your product and convince part of the public that the product is better than the other guy’s and not just because it’s cheaper. And I’m not willing to call all markets with differentiable products “partially monopolistic”.
Yes, we see advertising in “competitive” markets in the sense you are using (which appears to be something akin to “contested”), but not in the economic sense of “perfect competition” i.e. commodities. You are not disagreeing with me there. You may not be willing to call markets with differentiable products “partially monopolistic”, but I’m afraid I’m using standard usage. See e.g. Wikipedia:
Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes.
You should also note that as advertising is a fixed cost, not a marginal cost, so it wouldn’t affect the marginal cost anyway...
Unfortunately I feel like I’ve reached the end of the line trying to explain this to you.
Bollocks. Profits = revenues—costs. You can’t pay costs out of profits.
I already set my price at the level that would maximise my revenues.
The whole point of advertising is to change that level. You’re spending a pound per litre in order to change the equation which determines the proper price.
If you expect your advertising to reduce your profits why would you advertise in the first place?
Hi you two (Lumifer and Salemicus). A are you aware that you are having a wordy public conversation on a somewhat political topic more than two times deeper than the LW comment thread depth? I had trouble even finding the start of your conversion due to the limits. No one will vote on you and you clutter the recent comments. I recommend to both of you to discuss this as a privat conversation.
Thank you for taking the time to giving feedback this deep in the thread (hurray LW notification system). I reconsider my recommendation now. And will look away next time.
I am aware that we are having a wordy public conversation. I don’t consider microeconomics to be political, even “somewhat”. I don’t care whether anyone will vote on these posts or not. As to “cluttering” recent comments, all posts do that. If you don’t want to read this subthread, avert your eyes.
Hi you two (Lumifer and Salemicus). A are you aware that you are having a wordy public conversation on a somewhat political topic more than two times deeper than the LW comment thread depth? I had trouble even finding the start of your conversion due to the limits. No one will vote on you and you clutter the recent comments. I recommend to both of you to discuss this as a privat conversation.
Out of the firm’s profits.
Yes, this is true, in a sense. But it says nothing about what changes when one of these costs change. If the cost of office space increases, does that raise prices for consumers, or does it mean the firm has less to spend on golf club membership, or a mixture, or what?
Consider the toy example I gave above when I’m selling Coke to Alan and Bob—if you recall, I set the price at £2 per litre, and am making £1.90 in profit. Now suppose I start spending £1 in advertising. Do I raise the price to £3? Nope; I already set my price at the level that would maximise my revenues. It just means my profits are now only 90p.
Regarding substitutability: yes, Coke and Pepsi are partial substitutes, and electronic goods are not completely commodities. But Colas are much less substitutable than Samsung and HTC, or Dell and HP. The question is one of degree.
So try a model where all cola costs 10p a litre to produce, Alan values Coke and Pepsi equally at £3 a litre, Bob and Chris value Coke at £3 a litre, Pepsi at £1 a litre, and Dave and Edward value Coke at £1 a litre, Pepsi at £3 a litre. In equilibrium, how much will Coke sell for? How much will Pepsi sell for? Now suppose Coke and Pepsi each spend £1 on advertising. How much will Coke sell for? How much will Pepsi sell for?
Yes, we see advertising in “competitive” markets in the sense you are using (which appears to be something akin to “contested”), but not in the economic sense of “perfect competition” i.e. commodities. You are not disagreeing with me there. You may not be willing to call markets with differentiable products “partially monopolistic”, but I’m afraid I’m using standard usage. See e.g. Wikipedia:
You should also note that as advertising is a fixed cost, not a marginal cost, so it wouldn’t affect the marginal cost anyway...
Unfortunately I feel like I’ve reached the end of the line trying to explain this to you.
Bollocks. Profits = revenues—costs. You can’t pay costs out of profits.
The whole point of advertising is to change that level. You’re spending a pound per litre in order to change the equation which determines the proper price.
If you expect your advertising to reduce your profits why would you advertise in the first place?
Hi you two (Lumifer and Salemicus). A are you aware that you are having a wordy public conversation on a somewhat political topic more than two times deeper than the LW comment thread depth? I had trouble even finding the start of your conversion due to the limits. No one will vote on you and you clutter the recent comments. I recommend to both of you to discuss this as a privat conversation.
As it happens I was finding the conversation interesting.
Thank you for taking the time to giving feedback this deep in the thread (hurray LW notification system). I reconsider my recommendation now. And will look away next time.
I am aware that we are having a wordy public conversation. I don’t consider microeconomics to be political, even “somewhat”. I don’t care whether anyone will vote on these posts or not. As to “cluttering” recent comments, all posts do that. If you don’t want to read this subthread, avert your eyes.
I will avert my eyes. I accept your decision. It was a recommendation and you don’t need to take it.
Hi you two (Lumifer and Salemicus). A are you aware that you are having a wordy public conversation on a somewhat political topic more than two times deeper than the LW comment thread depth? I had trouble even finding the start of your conversion due to the limits. No one will vote on you and you clutter the recent comments. I recommend to both of you to discuss this as a privat conversation.