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Belch: Advertising and
Promotion, Sixth Edition
VII. Special Topics and
Perspectives
22. Evaluating the Social,
Ethical, & Economic
Aspects of Advtising &
Promotion
Advertising can also lower prices by making a market more competitive, which
usually leads to greater price competition. A study by Lee Benham found that prices of
eyeglasses were 25 to 30 percent higher in states that banned eyeglass advertising than
in those that permitted it. 100 Robert Steiner analyzed the toy industry and concluded
that advertising resulted in lower consumer prices. He argued that curtailment of TV
advertising would drive up consumer prices for toys. 101 Finally, advertising is a means
to market entry rather than a deterrent and helps stimulate product innovation, which
makes markets more competitive and helps keep prices down.
Overall, it is difficult to reach any firm conclusions regarding the relationship
between advertising and prices. After an extensive review of this area, Farris and
Albion concluded, “The evidence connecting manufacturer advertising to prices is
neither complete nor definitive . . . consequently, we cannot say whether advertising is
a tool of market efficiency or market power without further research.” 102
Economist James Ferguson argues that advertising cannot increase the cost per unit
of quality to consumers because if it did, consumers would not continue to respond
positively to advertising. 103 He believes advertising lowers the costs of information
about brand qualities, leads to increases in brand quality, and lowers the average price
per unit of quality.
Summarizing Economic Effects
Albion and Farris suggest that economists’ perspectives can be divided into two principal
schools of thought that make different assumptions regarding the influence of
advertising on the economy. 104 Figure 22-3 summarizes the main points of the “advertising
equals market power” and “advertising equals information” perspectives.
Advertising Equals Market Power The belief that advertising equals market
power reflects traditional economic thinking and views advertising as a way to change
consumers’ tastes, lower their sensitivity to price, and build brand loyalty among buyers
of advertised brands. This results in higher profits and market power for large advertisers,
reduces competition in the market, and leads to higher prices and fewer choices for
Figure 22-3 Two schools of thought on advertising’s role in the economy
Advertising = Market Power Advertising = Information
© The McGraw−Hill
Companies, 2003
Advertising affects consumer preferences and Advertising Advertising informs consumers about product
tastes, changes product attributes, and differ- attributes but does not change the way they
entiates the product from competitive offerings. value those attributes.
Consumers become brand loyal and less price Consumer buying Consumers become more price sensitive and buy
sensitive and perceive fewer substitutes for behavior best “value.” Only the relationship between
advertised brands. price and quality affects elasticity for a given
product.
Potential entrants must overcome established Barriers to entry Advertising makes entry possible for new brands
brand loyalty and spend relatively more on because it can communicate product
advertising. attributes to consumers.
Firms are insulated from market competition Industry Consumers can compare competitive offerings
and potential rivals; concentration increases, structure and easily and competitive rivalry increases.
leaving firms with more discretionary power. market power Efficient firms remain, and as the inefficient
leave, new entrants appear; the effect on
concentration is ambiguous.
Firms can charge higher prices and are not Market conduct More informed consumers pressure firms to
as likely to compete on quality or price lower prices and improve quality; new
dimensions. Innovation may be reduced. entrants facilitate innovation.
High prices and excessive profits accrue to Market Industry prices decrease. The effect on profits
advertisers and give them even more incen- performance due to increased competition and increased
tive to advertise their products. Output is
restricted compared with conditions of
perfect competition.
efficiency is ambiguous.
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Chapter Twenty-two Evaluating the Social, Ethical, and Economic Aspects
of Advertising and Promotion