Friday, February 22, 2013

Advertising and Fixed Costs

I saw an article the other day that warned of the "re-fi apocalypse." This morning I listened to a talk radio commercial break that was comprised entirely of re-fi ads. The commercials told me that the article is probably accurate.

How do you know when a bubble is about to burst? When those with a lot at stake in the bubble's continuation are desperately trying to gin up business to avert the end. Think 2000 Super Bowl.

So when business turns down, what makes the difference between shutting down shop and increasing your advertising budget? When fixed costs are zero, the end of the bubble just signals that it's time to move on. When fixed costs are positive, you can't costlessly move on, so you have reason to advertise instead. We should expect the industries that most-vociferously fight business downturns to be the industries with the highest fixed costs. Is this what we see? Sort of: airlines and car manufacturers are known for not yet meeting a dollar they couldn't spend on advertising.

But what explains the Dot-Com Super Bowl? I would think those companies had quite low fixed costs. If I shut down my esoteric web-based business, I can sell all the computers to other businesses and auction off all the Aeron chairs. Maybe we have to look at opportunity cost: when I work at a place with free bagels, a ping-pong table in the conference room, and pizza parties every Friday, I'm going to really fight to preserve that lifestyle. The massive spending on dot-com Super Bowl ads reflected the high valuations the dot-com crowd placed on their phoney-baloney jobs.

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