ABSTRACT
In chapter 13 , we showed that product differentiation can have a positive social impact. In the spatial model of product differentiation, desirable locations are good for the economy because they minimize the costs of obtaining goods and services and therefore increase consumer welfare. Similarly, given a choice between good and bad service, many consumers pay a premium to receive good service. The premium price that consumers voluntarily pay to eat Ben & Jerry’s or Häagen-Dazs ice cream instead of lower-quality brands also has social value. 1
The most controversial aspect of the general topic of product differentiation is advertising aimed at creating subjective differences between products. These images may be fraudulent or at the very least border on being fraudulent. Cars and cigarettes do not make one sexy and virile; beer consumption often leads to tragic consequences; and, sadly, students have killed each other over a pair of athletic shoes that may be of no higher quality than an inexpensive pair. These examples have resulted in a call from some to limit or even ban persuasive advertising. For example, in 1997 the Federal Trade Commission (FTC) and the R.J. Reynolds Tobacco Company negotiated a ban on the use of Joe Camel and other cartoon characters to sell cigarettes. This chapter analyzes the economic and social benefits and costs of advertising.
