Question

Dean goes to the grocery store to buy chips and soda for a party. He purchases brand name products even though generic versions are available at lower prices. His friend John says he was irrational to spend more for a nearly identical product. His friend Martina agreed with Dean’s decision to spend more for the brand name products.

a. Refer to Scenario 4. Which friend is a critic of brand names?

b. Refer to Scenario 4. Martina offers two reasons for agreeing with Dean’s decision. What are they?

c. Refer to Scenario 4. If Dean bought the brand name because of advertising he saw for the product, a defender of advertising would say

d. Refer to Scenario 4. If advertising were banned in these markets, what would likely happen to the prices of chips and soda?

e. Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the effectiveness of markets and decrease the social welfare of society.

Answer 1

Part A. John is a critic of brands and can be seen by the fact that he says “irrational to spend more for a nearly identical product.”

For part b, the existing case details are not enough. some details are missing

Part C. A defender of advertising would then highlight how advertising helps in brand creation and enforcement which later helps in brand recall. This can be seen by the fact that Dean feels branded products are better and able to identify the brands via the help of advertisement and thus purchases it over local brand.

Part D. As advertisements involves huge cost, If advertisements are banned, the prices of products would fall(due to lower costs incurred in marketing). Without ads, brand establishment and recall is also lowered, hence, the products will compete on the price at which they are being sold. As customer would want to reap maximum benefit at lowest possible prices, the prices of products would be lowered to compete the local products.

Part E. Due to advertising, huge costs are incurred. This cost is later recovered from the customers by charging a higher price. This therefore increases the cost of living and inflation in the market. Advertisemnt doesn’t lead to a production of a good but instead is aimed at selling the existing product.so, additional costs do not bring with them a substantial welfare gain. All these factors reduce social welfare of society and effectiveness of markets.