Chapter 5: Economics of advertising: the role of commercial media
Firms and organizations have the need to communicate with the public. For instance, a consumer package goods manufacturer informs its customers about a new product, or a retail merchant announces its upcoming price reductions. We define this form of communication as advertising. As with any form of communication, a medium is necessary to deliver the message. Commercial media is the typical medium for advertising. In this chapter we study the economics of advertising with particular attention to the role that commercial media play in facilitating businesses’ and non-profits’ desire to communicate with consumers. We examine advertising from an economic perspective. That is, we assume that advertising is a market activity in which participants respond to their private incentives. The market for advertising is a significant aspect of economic activity – typically over 2 percent of the US gross domestic product in recent years. But where does this money go? Until recently, economists had not addressed this question. Rather, they focused on the demand side of advertising, trying to understand the effects of advertising on consumers and on the markets for the advertised products. Such a focus, however, overlooks the supply side of advertising: the role of commercial media to supply consumer attention to advertisers. The primary source of revenue for commercial media is, in fact, through the sale of advertising. There has been a surge of academic activity that examines the supply side aspects of advertising into which this chapter taps.
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