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Why marketers advertise to consumers who can’t afford their product

Advertising dollars are spent to reach potential consumers and inform them about a product, and perhaps the single largest American venue to do this is the Super Bowl. Companies that buy ad time during the Super Bowl have the potential to extend the reach of their ad if it makes a splash and gets talked about in the follow-up news cycle, so it’s no wonder so many companies are willing to pay top dollar for Super Bowl ads. However, it would seem this money would only be well spent if the Super Bowl audience included a large proportion of potential consumers for a given product; otherwise, how would such a massive expense pay off?

While many consumers of Veblen goods - goods that signal high status through conspicuous consumption (e.g., Mercedes, Gucci, Jaguar, Rolex) - certainly watch the Super Bowl, such consumers must also represent only a very small proportion of the total viewership. Why would any company selling such high ticket items waste their money by advertising to viewers who can’t afford its products? Why wouldn’t they spend their advertising money more efficiently by advertising through venues packed with one-percenters like Forbes, Barron’s, or The Wall Street Journal?

The answer to this apparent paradox is not that marketers for Veblen goods don’t know what they’re doing, but rather that the very status-signaling nature of Veblen goods requires signaling their value to everyone - even those who could never afford the product. Conspicuous consumption only works as a status signal if it is indeed conspicuous, making Veblen goods a special kind of what Economist Michael Chwe refers to as “social goods.” What good does it do to own a Bentley if no one knows what it represents?

 

Status is a convention, a particular kind of social construction relying on what game theorists call common knowledge. Chwe has analyzed advertising spend per viewer, and has found that “popular shows are able to charge advertisers more per viewer for commercial slots, because popular shows better generate common knowledge.” Something can only signal high status if people know it is worthy of being revered, and know that everyone knows, know that everyone knows that everyone knows that everyone knows, and so on, that the signal distinguishes those with high status. Thus, it is just as important - perhaps even more important - that Veblen goods are established as such to those segments not being able to afford them in the first place.

 

Economists have noted status goods are often advertised not so much to alert potential buyers (who already know about the product), but to signal they are high status goods to everyone else. The analysis presented here takes this even further, suggesting not only must non-consumers know what a Veblen good symbolizes, but this must also be common knowledge. That is, a Bentley is only a status symbol because everyone knows this, knows that everyone else knows it, knows that everyone knows that everyone knows, and so on. This is why high status brands will often pay a premium to advertise in highly public arenas like the Super Bowl, and explains how advertising dollars may be useful even if they don't directly translate into sales. The Super Bowl creates common knowledge because everyone watches it, and most importantly, everyone knows that everyone else watches it.

 

Michael Chwe has done extensive work showing the same effect explains why companies selling goods requiring network coordination (e.g., hiring websites, computer platforms, etc.) are also willing to pay a premium for spots during America’s largest televised common knowledge generator. Both network coordination and conventions (like status) have a deep underlying isomorphism (similarity), in that they both represent a kind of coordination problem, or a scenario depending deeply on common knowledge. Establishing a brand or product as elite is part of the requisite brand equity for successfully marketing a Veblen good, and can explain why companies would pay to advertise such status signals even to those who cannot afford them.

 

You can find a more formal model here.

 

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Posted by Kyle Thomas on Jan 31, 2014

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