The point is that firms selling quality products are in a better position than firms selling poor quality products if they can convince consumers to try their product. Thus, firms selling high quality products achieve repeat sales, unlike firms selling low quality products. For this reason, there is a certain amount of advertising costs, which is ready to bear the company that sells high-quality products, and not ready to the company that sells low-quality. Thus, in the equilibrium state of advertising is a sure sign that the product is of high quality.
Treating advertising as a signal makes certain adjustments to the idea of "wasteful" advertising. In equilibrium, positive advertising costs are unnecessary in the sense that they do not carry direct information about the characteristics of the product. However, a balance with advertising may be more effective than a balance without advertising. If advertising had not been available, it might have been the case that firms producing high quality products would not have been interested in further work, as their product would have become (presumably) identical to a low quality product. If, however, the high quality of the product is highly priced by consumers, the result of the lack of advertising may be even worse, even taking into account the savings on advertising. In other words, a balance with advertising may be more effective because the indirect information value of advertising exceeds the advertising costs.
Advertising is information disseminated by any means, using various means and forms, disseminated by any means, in any form and using any means, which is addressed to an undefined circle of persons and is aimed at drawing attention to the object of promotion, forming or maintaining interest in it. Advertising has an impact on consumers at three levels: incentive (direct action), where the buyer feels the desire to immediately buy the product, indirect (constant reminder of the brand of the product lead to the purchase of the product) and incentive (a combination of the two previous levels is designed to encourage the consumer to make a purchase in the future. Thus, we can say that the objectives of advertising are divided into: informing the consumer about the existence of the product, increasing the demand for the product and the level of its production, stimulating competition. In addition, advertising contributes to the independence of the media, bringing them a lot of profit. All this only confirms the hypothesis that advertising is an integral part of the market process.
The advertising goal of a firm playing in the conditions of monopolistic competition, is to increase its market share and strengthen the loyalty of consumers in relation to its differentiated product. In other words, such a firm expects advertising to move its demand curve to the right and at the same time reduce its price elasticity. It is also worth noting that when planning and organizing advertising activities, it is necessary to calculate the best option. After all, very often engaged in advertising is not so much to win, but rather in order to avoid "lose" in competition. Based on this, it is necessary to clearly define the means of advertising, to assess the pros and cons of each, whether it be television, press or outdoor advertising media.
A distinctive feature of advertising as a method of non-price competition is its ability to reduce consumer sensitivity to price, as well as the ability to unobtrusively raise barriers to market entry. But the increase in advertising costs leads to an increase in the overall level of costs. Therefore, the effectiveness of advertising (change in profit) will depend on the nature of changes in average costs and changes in demand, which may increase or decrease. If demand turns out to be significantly higher than the growth of average costs, the company's profit will be extremely high, which indicates the effective advertising campaign. Conversely, advertising is extremely ineffective if the mutual changes in demand and costs contribute to the reduction of the firm's profits.
However, the additional profit of the firm after the implementation of promotional activities is not only due to increased sales. Also, here plays a role such a factor as the reduction of average production costs, which are the result of reducing the volume of excess production capacity.
Continuation follows.