An analysis of some problems in advertising and quality competition with special reference to consumer durables markets

The thesis examines advertising behaviour and quality-setting behaviour at the firm level. In both cases economic theory is used to discover theoretically optimal behaviour patterns which may then be compared with the behaviour patterns exhibited by firms operating in the real world. The 'neoclassical' economic model of advertising is reviewed and a general version embodying the 'marketing mix' concept is developed. Possible means of testing for optimal advertising behaviour at the firm level are discussed. The usual method of testing for optimal advertising behaviour was shown to rely on a method which provided no information about the behaviour of firms, the usual test relies on a 'snapshot' comparison of values of the firm's discretionary variables and parameters of the demand function facing the firm. An alternative method of testing is developed the use of a stock-adjustment approach in conjunction VJith an loptimality rule' allows the construction of a test which views firms' behaviour. The test is applied to advertising data for the five major U. K. motor manufacturers during the period 1958-68. The 'quality' problem is analysed at the model or variety level. The problem of defining 'quality' is discussed, and it is suggested that if 'quality' is suitably defined there will be a useful relationship between the prices and 'qualities' of a varieties of a given product. The possible theoretical bases a price-quality relationship (and hence the 'Hedonic' technique) are analysed and shown to indicate different forms for the price-quality relationship. Appropriate methods of estimating the price-quality relationship are suggested. A model of variety demand allowing for quality differences by incorporating the residuals from the estimated price-quality relationship in the demand function is proposed. Price-quality relationships and demand functions are estimated using data for U.K. passenger cars.