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Advertising as a Distortion of Social Learning

Author

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  • Brekke, Kjell Arne

    (The Ragnar Frisch Centre for Economic Research)

  • Rege, Mari

    (University of Stavanger)

Abstract

By combining a theory of herding behavior with the phenomenon of availability heuristic, this paper shows that non-informative advertisements can affect people’s choices by influencing their perception of product quality. We present a model in which people can learn about product quality by observing the choices of others. Consumers are, however, not able to fully distinguish between the observations of real people and fictitious characters in advertisements. Even if a person is aware of this limitation and updates his beliefs accordingly, it is still rational for him to choose the product he has observed most often. In equilibrium the most observed product is always most likely to be of the highest quality. The analysis has important policy implications.

Suggested Citation

  • Brekke, Kjell Arne & Rege, Mari, 2006. "Advertising as a Distortion of Social Learning," Memorandum 23/2006, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2006_023
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2006/Memo-23-2006.pdf
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    References listed on IDEAS

    as
    1. Albrecht, James & Lang, Harald & Vroman, Susan, 2002. "The effect of information on the well-being of the uninformed: what's the chance of getting a decent meal in an unfamiliar city?," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 139-162, February.
    2. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    4. Anderson, Lisa R & Holt, Charles A, 1997. "Information Cascades in the Laboratory," American Economic Review, American Economic Association, vol. 87(5), pages 847-862, December.
    5. Ignatius Horstmann & Sridhar Moorthy, 2003. "Advertising Spending and Quality for Services: The Role of Capacity," Quantitative Marketing and Economics (QME), Springer, vol. 1(3), pages 337-365, September.
    6. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    7. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    8. Kwoka, John E, Jr, 1984. "Advertising and the Price and Quality of Optometric Services," American Economic Review, American Economic Association, vol. 74(1), pages 211-216, March.
    9. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    10. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    11. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
    12. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    13. Yuk-Shee Chan & Hayne Leland, 1982. "Prices and Qualities in Markets with Costly Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(4), pages 499-516.
    14. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 28, pages 1701-1844, Elsevier.
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    Cited by:

    1. Loginova, Oksana, 2009. "Exposure order effects and advertising competition," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 528-538, August.
    2. Brekke, Kjell Arne & Nilssen, Tore, 2015. "Media competition enhances new-product entry: On the market for fake observations," Information Economics and Policy, Elsevier, vol. 31(C), pages 59-66.
    3. Bingsheng Liu & Wenwen Zhu & Yinghua Shen & Yuan Chen & Tao Wang & Fengwen Chen & Maggie Wenjing Liu & Shi‐Hao Zhou, 2022. "A study about return policies in the presence of consumer social learning," Production and Operations Management, Production and Operations Management Society, vol. 31(6), pages 2571-2587, June.
    4. Oksana Loginova, 2008. "Exposure Order Effects and Advertising Competition," Working Papers 0806, Department of Economics, University of Missouri.

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    More about this item

    Keywords

    Advertising; availability heuristic; herding behavior; information; product quality;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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