American Economic Review: Vol. 96 No. 3 (June 2006)

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On the Simple Economics of Advertising, Marketing, and Product Design

Article Citation

Johnson, Justin P., and David P. Myatt. 2006. "On the Simple Economics of Advertising, Marketing, and Product Design." American Economic Review, 96(3): 756-784.

DOI: 10.1257/aer.96.3.756

Abstract

We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers' valuations, which lead to rotations of the demand curve. In many settings, profits are a U-shaped function of dispersion. High dispersion is complemented by niche production, and low dispersion is complemented by mass-market supply. We investigate numerous applications, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand. (JEL D8, L1, M3).

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Authors

Johnson, Justin P.
Myatt, David P.


American Economic Review


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