Transcript Advertising, Signaling and Product Information

Electronic Commerce
Advertising, Signaling and Product
Information
Signals and product
information
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More advertisement, lower searching cost
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(Stigler’s argument)
Matching the demand and the supply
For experienced goods, more advertisement means higher
quality (Nelsen effect)
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A firm afforded the large amount of advertising will safeguard the
product quality for the future/continuous transactions to recover
the priori investment. (credible commitments)
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For searching goods, higher price means higher quality
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The compensation for investment of quality improvement
Continuous advertisement (Leffler effect)
(Schumalensee effect)
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Maintain the incumbent’s reputation and entry deterrence
Economic roles of advertising
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To
To
To
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Informative purpose
inform customers
Persuasive purpose
increase demands
change the elasticity of demand
Competitive purpose
deter the entrants
differentiate from competitors
Drivers of Increasing Internet
Advertising
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Extended product endorsements and
reviews from customers (a source of persuasive
information)
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Instant cross-linkage between
advertisement and web purchasing
Advertising solicits more searching product
lists
Automatic update of product lists
Performance of Internet
Advertising
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High success rate of targeting
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High-tech & High-touch
Low Internet penetration rate
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Insufficient coverage of sampling frame for exhaustive
targeting
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TV & newspaper still dominated
Extending by network convergence
Increasing mobility & interactivity (3G’s intimacy)
Higher advertising cost per user
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Integrating advertising channels
Types of Internet
advertisement
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Banner ads
Email ads (junk emails)
Web storefront (URL linkage)
Pop-up ads (annoying but effective)
Subscription-based advertisement (coupon &
discounted privilege)
Increase demand
Change the demand elasticity
Create the
necessity and
instant
consumption to
lower the price
down for
expanding
market share
Create
differentiated
image and raise
the price higher
to extract more
surplus without
losing many
sales
Information about information
products
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Truth of product information won’t be verified
until information had been revealed thoroughly.
However, the price of information probably failed
after public information acknowledgement.
A secret algorithm but a convincible signal
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Zero-knowledge proof: a signal providing a complete
and perfect information about the quality without
revealing the intrinsic information/secrets of product
Proxy signals of actual quality
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Demonstration
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Past performance
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The black box approach
Educational level, career experience
Benchmark
(key players in the market)
The effect of advertising on
price
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Absolute price
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Price dispersion
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Informative purpose: lower down searching cost and facilitate
comparison, lower prices
Persuasive purpose: ensure quality and raise prices higher
More informed customers: lower price dispersion (on the Internet)
Higher searching cost: higher price dispersion
Market efficiency
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Price higher than before: advertising costs are more than the
saved searching cost
Price lower than before: advertising costs are more than the saved
searching cost
The effect of Advertising on
the product differentiation
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Vertical differentiation: quality differences
Horizontal differentiation: feature differences
Advertising enhances the degree of
differentiation (especially, in the horizontal dimension)
More informed customers: high price means
high quality (searching goods)
For experienced goods: persuasive purpose and
the possibility of trying out
Internet advertising
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Renting reputation: leveraged and allied with
reputable firms to conglomerate in the web
portal
Shareware and wasted investment
Quality guarantee and refundable
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Aggregate insurance among complementors
Trust within community
Average fraud rate (very low fraud rate on the eBay)
Effective online advertising
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Visually appealing
Targeting customers
Valuable contents
Brand name matters
Linking to the overall marketing strategy
Combination between push and pull manners
Interactive marketing
Commoditization of advertisements as a new
Internet business (electronic intermediaries, e.g.,
24/7 realmedia.com, doubleclick.com)