­

Advertising as a Distortion of Social Learning

Authors:

Brekke, Kjell Arne and Mari Rege

Year:

2007

Reference:

The B.E. Journal of Theoretical Economics

7(1) (Topics), Article 38

Summary

By combining a theory of herding behavior with the phenomenon of availability heuristic, this paper shows that non-informative advertisements can a¤ect people’s choices by in‡uencing their perception of product quality. We present a model in which people can learn about product quality by observing the choices of others. Consumers are, however, not able to fully distinguish between the observations of real people and …ctitious characters in advertisements. Even if a person is aware of this limitation and updates his beliefs accordingly, it is still rational for him to choose the product he has observed most often. In equilibrium the most observed product is always most likely to be of the highest quality. The analysis has important policy implications.

JEL:

D21, L15, M37

Keywords:

Advertising, availability heuristic, herding behavior, information, product quality

Project:

Oppdragsgiver: Norges forskningsråd
Oppdragsgivers prosjektnr.:
Frisch prosjekt: 8101 - Advertising and Competition in Markets with Network Externalities