To Tax or Not to Tax Advertising: In the text, we discussed two different views of advertising—one of which we said arises primarily from an economist’s perspective, the other primarily from a psychologist’s. The nature of public policy toward the advertising industry will depend on which view of advertising one takes.
A: Consider the two views—informational advertising and image marketing.
(a) In what sense does information advertising potentially address a market condition that represents a violation of the first welfare theorem?
(b) In what sense does image marketing result in potentially negative externalities? Might it result in positive externalities?
(c) If you wanted to make an efficiency case for taxing advertising, how would you do it? What if you wanted to make an efficiency case for subsidizing it?
(d) Suppose a public interest group lobbies for regulatory limits on the amount of advertising that can be conducted. Explain how this might serve the interests of firms?
B: Consider the three-stage image marketing model in Section 26B.6 but assume that f (a1, a2) = a1/2 1 +a1/2 2. Suppose further that the cost for consumer n from consuming y is α (n − y) 2 −γα, with γ= 0 unless otherwise stated.
(a) Solving the game backwards (in order to find sub game perfect equilibria), does anything change in stages 2 and 3 of the game?
(b) What would be the advertising levels chosen by each firm.
(c) Suppose the two firms can collude on the amount of advertising each undertakes (but the rest of the game remains the same). Would they choose different levels of a1 and a2?
(d) For what level of γ = γ is there no efficiency case for either subsidizing or taxing advertising? What if γ > γ? What if γ < γ?