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Part Seven Special Topics and Perspectives
Belch: Advertising and
Promotion, Sixth Edition
Exhibit 22-20 Advertising
is very important to
companies such as Daewoo
Motor America as it enters
the U.S. market
Exhibit 22-21 This ad
refutes the argument that
reducing advertising
expenditures will lead to
lower prices
VII. Special Topics and
Perspectives
22. Evaluating the Social,
Ethical, & Economic
Aspects of Advtising &
Promotion
© The McGraw−Hill
Companies, 2003
Exhibit 22-20 shows an ad for the company’s flagship
Leganza model, which is positioned as offering “affordable
luxury.”
Effects on Product Costs and Prices
A major area of debate among economists, advertisers,
consumer advocates, and policymakers concerns the
effects of advertising on product costs and prices. Critics
argue that advertising increases the prices consumers pay
for products and services. First, they say the large sums
of money spent advertising a brand constitute an expense
that must be covered and the consumer ends up paying
for it through higher prices. This is a common criticism
from consumer advocates. Several studies show that
firms with higher relative prices advertise their products
more intensely than do those with lower relative prices. 95
As discussed in the previous chapter, concern has been
expressed that the tremendous increase in direct-toconsumer
drug advertising by pharmaceutical companies
in recent years is driving up the cost of prescription
drugs. Critics argue that the millions of dollars spent on
advertising and other forms of promotion are an expense
that must be covered by charging higher prices. 96
A second way advertising can result in higher prices is
by increasing product differentiation and adding to the
perceived value of the product in consumers’ minds. Paul
Farris and Mark Albion note that product differentiation
occupies a central position in theories of advertising’s
economic effects. 97 The fundamental premise is that advertising increases the perceived
differences between physically homogeneous products and enables advertised
brands to command a premium price without an increase in quality.
Critics of advertising generally point to the differences in prices between national
brands and private-label brands that are physically similar, such as aspirin or tea bags, as
evidence of the added value created by advertising. They see consumers’willingness to pay
more for heavily advertised national brands rather than purchasing the lower-priced, nonadvertised
brand as wasteful and irrational. The prescription drug industry is again a very
good example of this, as critics argue that the increase in advertising is encouraging consumers
to request brand-name drugs and steering them away from lower-priced generics. 98
However, consumers do not always buy for rational, functional reasons. The emotional,
psychological, and social benefits derived from purchasing a national
brand are important to many people. Moreover, say Albion and Farris,
Unfortunately there seems to be no single way to measure product differentiation,
let alone determine how much is excessive or attributable to the
effects of advertising . . . Both price insensitivity and brand loyalty could be
created by a number of factors such as higher product quality, better packaging,
favorable use experience and market position. They are probably related
to each other but need not be the result of advertising. 99
Proponents of advertising offer several other counterarguments to
the claim that advertising increases prices. They acknowledge that
advertising costs are at least partly paid for by consumers. But advertising
may help lower the overall cost of a product more than enough to
offset them. For example, advertising may help firms achieve
economies of scale in production and distribution by providing information
to and stimulating demand among mass markets. These
economies of scale help cut the cost of producing and marketing the
product, which can lead to lower prices—if the advertiser chooses to
pass the cost savings on to the consumer. The ad in Exhibit 22-21, from
a campaign sponsored by the American Association of Advertising
Agencies, emphasizes this point.