The law governing distribution is interesting because product distribution itself is fascinating. How do the tens of thousands of products in the modern economy get produced and distributed throughout the world?
Advertising is an essential element of most products’ distribution. But there are lots of interesting questions and puzzles about the exact role and purpose of advertising.
In thinking about this issue, I remembered hearing a recent program on the radio about the purpose of certain luxury goods advertising. I can’t remember if the program was an episode of NPR’s “Planet Money” or was an episode of “Marketplace” (another public radio show). No matter; the Intertubes provide lots of other sources.
For example, the issue is discussed in this article. Here’s a specific example: if you walk through any retail mall, you’ll notice some very different approaches taken by stores. Certain luxury good stores (think jewelry) have very expensive, tasteful, and upscale interiors, furniture and decor, and are usually staffed by attractive salespeople. Compare and contrast with the average mall food court restaurant, or the average mall Radio Shack.
What’s the purpose of the jewelry’s store investment in all of its various forms of advertising? Is it to provide product information to consumers? That seems unlikely; the upscale nature of the store and its personnel doesn’t really convey such information. Anyway, how much information do consumers need about earrings and necklaces? Perhaps the purpose is to facilitate connections in consumers’ minds (our products are often found in pleasant, upscale environments; if you buy them, you’ll likely find yourself in such environments, too). But fancy stores seem an expensive way to achieve this end.
In the case of the jewelry store, the advertising may instead constitute a signal — again, as explained in the article linked above:
[C]onsider the case when sellers of an experience good cannot make credible claims about high quality; a low-quality seller loses little by claiming its quality is high. A seller of high-quality experience goods can, however, signal its quality by spending a sufficient amount on advertising. Suppose consumers become repeat customers only if they enjoy high quality upon the first trial. Due to repeat sales, the high-quality seller has more potential profit than a low-quality imitator. In order to credibly convince the consumer it is high quality, the seller can publicly spend off or “burn” some of these future profits by advertising to such an extent that a low-quality producer would find it unprofitable to imitate. The rational consumer observes this seller spending lots of money on advertising and concludes that it is offering a high-quality product. It is worthwhile to note that the advertising message itself is irrelevant beyond the cost to provide it. As long as consumers know how much money was burned.
This explanation seems plausible. The average consumer can’t evaluate claims about whether a jewelry store’s jewelry is high quality. For all the consumer knows, it could be fake. So to assure the consumer of quality, the store signals that it is prosperous and successful, and does so by investing in store interiors, furniture, fixtures, etc. The advertising becomes an end to itself — a public display of money to burn.
How, then, to explain Internet-only jewelry stores, like Blue Nile, or like Plukka? That’s an interesting question, and I’m not sure I know the answer.