On the Simple Economics of Advertising, Marketing, and Product Design

We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers` valuations, which lead to rotations of the demand curve. In a wide variety of settings, profits are a U-shaped function of dispersion. A high level of dispersion is complemented by a niche posture, and low dispersion is complemented by a mass-market posture. We investigate numerous applications of our framework, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand.