|
|
|
|
How does a firm establish the uniqueness of its product? Take, for example, the local pizza shop. Part of the pizza strategy is to create a unique product. Maybe that means using special sauce, the freshest ingredients, or a wood-fired oven. That is only half the battle to achieve successful product differentiation. The second part is to convince people that the product is unique. The perception of uniqueness is just as important as actually creating a unique product. Take the mineral water industry as an example. The difference between grocery store water and a brand name mineral water is imperceptible. Why do people pay so much for the brand name water? The reason is that they believe that it is unique. They believe the generic spring water is not a close substitute. How do people come to this belief? The answer is advertising. The goal of advertising is to establish product differentiation and create as inelastic a demand as possible. The intuition is that the more inelastic the demand, the more the firm can profit. For now, though, assume that product differentiation is a profitable strategy and ask if it is also a socially desirable strategy. The tables below provides some data on the amounts of money spent on advertising:
When evaluating the social value of advertising, the question posed is, does advertising respond to the desires of a society or does advertising create the desires of a society?
|
