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Markets and Psychology

Markets and Psychology. Overview of Lecture. Empirical Work on Psychology in Markets Models. 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?.

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Markets and Psychology

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  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?

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

  14. Problems • Statistical Issues?

  15. Problems • Statistical Issues? • Small Samples for each experiment? • Why? • Time Series Properties

  16. 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

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

  18. 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

  19. Cash User Phone Script

  20. Gain Frame

  21. Gain/Loss Frame Results

  22. Interpretations?

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

  24. Problems? • How to resolve?

  25. Interpretations?

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

  27. Framing Price Cuts

  28. Predictions

  29. Interpretations?

  30. 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

  31. Predictions?

  32. Results

  33. Interpretation

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

  35. 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?

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