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Belch: Advertising and
Promotion, Sixth Edition
VII. Special Topics and
Perspectives
Virgin Atlantic Airways recognize that advertising has
been an important part of their success (Exhibit 22-19).
22. Evaluating the Social,
Ethical, & Economic
Aspects of Advtising &
Promotion
Effects on Competition
One of the most common criticisms economists have
about advertising concerns its effects on competition.
They argue that power in the hands of large firms with
huge advertising budgets creates a barrier to entry,
which makes it difficult for other firms to enter the market.
This results in less competition and higher prices.
Economists note that smaller firms already in the market
find it difficult to compete against the large advertising
budgets of the industry leaders and are often driven out of
business. For example, in the U.S. beer industry, the
number of national brewers has declined dramatically. In
their battle for market share, industry giants Anheuser-
Busch and Miller increased their ad budgets substantially
and reaped market shares that total over 60 percent.
Anheuser-Busch alone spent nearly $700 million on
advertising in 2002. However, these companies are
spending much less per barrel than smaller firms, making
it very difficult for the latter to compete.
Large advertisers clearly enjoy certain competitive
advantages. First, there are economies of scale in advertising,
particularly with respect to factors such as media
costs. Firms such as Procter & Gamble and PepsiCo,
which spend over $2 billion a year on advertising and
promotion, are able to make large media buys at a
reduced rate and allocate them to their various products.
Large advertisers usually sell more of a product or service, which means they may
have lower production costs and can allocate more monies to advertising, so they can
afford the costly but more efficient media like network television. Their large advertising
outlays also give them more opportunity to differentiate their products and
develop brand loyalty. To the extent that these factors occur, smaller competitors are at
a disadvantage and new competitors are deterred from entering the market.
While advertising may have an anticompetitive effect on a market, there is no clear
evidence that advertising alone reduces competition, creates barriers to entry, and thus
increases market concentration. Lester Telser noted that high levels of advertising are
not always found in industries where firms have a large market share. He found an
inverse relationship between intensity of product class advertising and stability of
market share for the leading brands. 93 These findings run contrary to many economists’
belief that industries controlled by a few firms have high advertising expenditures,
resulting in stable brand shares for market leaders.
Defenders of advertising say it is unrealistic to attribute a firm’s market dominance
and barriers to entry solely to advertising. There are a number of other factors, such as
price, product quality, distribution effectiveness, production efficiencies, and competitive
strategies. For many years, products such as Coors beer and Hershey chocolate
bars were dominant brands even though these companies spent little on advertising.
Hershey did not advertise at all until 1970. For 66 years, the company relied on the
quality of its products, its favorable reputation and image among consumers, and its
extensive channels of distribution to market its brands. Industry leaders often tend to
dominate markets because they have superior product quality and the best management
and competitive strategies, not simply the biggest advertising budgets. 94
While market entry against large, established competitors is difficult, companies
with a quality product at a reasonable price often find a way to break in. Moreover,
they usually find that advertising actually facilitates their market entry by making it
possible to communicate the benefits and features of their new product or brand to
consumers. For example, South Korea’s Daewoo Motor Co. entered the U.S. automotive
market in 1998 and has used advertising to create a brand identity for its cars.
© The McGraw−Hill
Companies, 2003
Exhibit 22-19 Virgin
Atlantic Airways chair
Richard Branson
acknowledges the
importance of advertising
775
Chapter Twenty-two Evaluating the Social, Ethical, and Economic Aspects
of Advertising and Promotion