Notes on the Economic Effects of Advertising

Advertising = Market Power

Adv differentiates brands & creates "durable brand loyalty."

Consumers become less price sensitive as they perceive fewer substitutes for the advertised brand.

The heavy adv expenditures required of potential competitors to overcome brand loyalty constitute a barrier to entry.

Advertised brands are insulated from competition and concentration increases.

Firms can charge higher prices & are less likely to compete on quality or price. Innovation curtailed.

Advertisers' high prices lead to excessive profits which, in turn, leads to more spending on advertising. Output restricted?

End result? Advertising fleeces consumers who have been too duped to realize they're being exploited.

Advertising = Information

Adv informs consumers about products and product attributes.

Consumers become more price sensitive and price is determined by quality.

Adv makes entry possible for new brands by making consumers aware of new products & attributes.

Consumers compare prices, new entrants appear & inefficient firms are driven out. Concentration decreased?

Prices decreased as competition prevents firms from dictating prices.

End Result? Advertising empowers consumers and fair-minded, efficient advertisers for everyone's mutual benefit.

Elements of both models

Market Power

vs.

Information

Advertising influences barriers to entry?

It creates them.

It reduces them.

Advertising leads to economies of scale?

It allows only heavy advertisers to achieve them.

It enables efficient firms to achieve them.

Advertising affects consumer price sensitivity?

It reduces it to the benefit of big advertisers.

It increases it to the benefit of consumers.

Advertising differentiates brands from one another?

It induces differentiation.

It calls attention to innate differentiation.

Advertising significantly influences consumers?

It exploits them.

It empowers them.

Concentration determines prices & consumer welfare?

Advertising encourages concentration & concentration hurts consumers.

Advertising reduces concentration & helps consumers.

So what's missing from these models?

* influence of product/advertising life cycle

* factory vs. consumer prices

* role of the retailer (vertical competition)

* difference between absolute and relative prices

* presence of relatively unadvertised private labels

* importance of interstore and intrastore comparisons

*does the impact of advertising on prices matter as much as the power of global brands and other marketing and promotional tools?

Implications? See pages 126 - 130.