In reading the recent report ‘advertising Pays: How advertising fuels the uK economy’
by deloitte llP, it occurs to me how important continued research on the economic
effects of advertising is needed (deloitte 2013). While I have addressed this before in this
space (see taylor 2012), the striking findings of this report underscore the need for more
attention to be paid to this general issue. It also occurs to me that an existing framework
for examining the debate over the economic effects of advertising should be invoked more
frequently, but more on that later
In reading the recent report ‘advertising Pays: How advertising fuels the uK economy’
by deloitte llP, it occurs to me how important continued research on the economic
effects of advertising is needed (deloitte 2013). While I have addressed this before in this
space (see taylor 2012), the striking findings of this report underscore the need for more
attention to be paid to this general issue. It also occurs to me that an existing framework
for examining the debate over the economic effects of advertising should be invoked more
frequently, but more on that later
In reading the recent report ‘advertising Pays: How advertising fuels the uK economy’
by deloitte llP, it occurs to me how important continued research on the economic
effects of advertising is needed (deloitte 2013). While I have addressed this before in this
space (see taylor 2012), the striking findings of this report underscore the need for more
attention to be paid to this general issue. It also occurs to me that an existing framework
for examining the debate over the economic effects of advertising should be invoked more
frequently, but more on that later
International Journal of advertising, 32(3), pp. 339342
2013 advertising association Published by Warc, www.warc.com doI: 10.2501/IJa-32-3-339-342 Editorial On the economic effects of advertising evidence that Advertising = Information Charles r. taylor Villanova University In reading the recent report advertising Pays: How advertising fuels the uK economy by deloitte llP, it occurs to me how important continued research on the economic effects of advertising is needed (deloitte 2013). While I have addressed this before in this space (see taylor 2012), the striking findings of this report underscore the need for more attention to be paid to this general issue. It also occurs to me that an existing framework for examining the debate over the economic effects of advertising should be invoked more frequently, but more on that later. the advertising Pays report, commissioned and published by the advertising association, is available online. I believe that it is important for everyone in the advertising field to be familiar with the issues addressed in the report and would encourage you to read it. Moreover, the report draws attention to several areas in need of sustained research. Before moving on, in the interest of full disclosure, I should mention that the advertising association is the owner of this journal. some of deloittes key conclusions based on econometric analysis and a series of case studies are: advertising fuels the economy and is a driver of economic growth. for every 1 billion spent on advertising in the uK, a 6 billion increase in annual gdP ensues. advertising provides information that: 1) helps consumers compare products and prices; 2) connects companies and consumers; and 3) informs purchase decision. advertising plays an important role in spurring information by bringing innovative product to the market and playing a role in building brands in a way that protects the innovation. advertising drives competition via the promotion of price and product differentiation. Consumers ultimately benefit from advertising through having more choices and more affordable products. advertising supports the media and creative industries, and 550,000 jobs in the uK depend on advertising. advertising supports exports. advertising by the government, non-profits and private sector corporations encourages positive behavioural change and, thus, makes a positive social contribution to society that has an economic value. 340 InternatIonal Journal of advertIsIng, 2013, 32(3) While several, if not all, of these findings may come as no surprise to those in the advertising field, the report suggests that society as a whole often loses sight of the con- tributions made by advertising, stating (p. 10): advertisings contribution to the uK economy is often lost among narrower debates about the industry. to help address this imbalance, the advertising association commissioned deloitte to examine the economic impact of advertising in the uK. While I would stress that some of the narrower debates around advertisings role in society and how it should be regulated are very important, the idea that the general eco- nomic effects of advertising are too seldom discussed and acknowledged would seem to hold true. as Herb rotfeld and I observed in an article in Journal of Advertising published in 2009, too often, articles on current issues such as public health (e.g. obesity in society; prescription drug promotion practices; alcohol consumption), high consumer spending and debt, privacy issues, public aesthetics, etc., advocate regulating advertising as a solu- tion to problems. this is done without actually exploring the underlying mechanisms via which advertising works and, especially, issues related to the economic and societal effects of advertising (rotfeld & taylor 2009). In my opinion, one of the greatest, yet underappreciated, pieces of work in the history of the advertising field was a book by Mark albion and Paul farris published in 1981 titled The Advertising Controversy: Evidence of the Economic Effects of Advertising. the same authors also published a related article in Journal of Marketing in 1980 that had a specific focus on advertisings impact on pricing. In their book, albion and farris introduced the notion that there are two primary schools of thought on the economic effects of advertising: the advertising = Information school and the advertising = Market Power school. the two schools provide very opposing views of advertisings impact on the economy and society. as outlined by ornstein (1977, p. 2), the advertising = Market Power schools central tenet can be summarized as follows: In short, advertising increases industrial con- centration, raises barriers to entry, and, therefore, leads to collusion and market power. the result is restricted output, raised prices, inefficient allocation of resources, long-run excess profits of monopolists, and distortion in distribution of wealth. Historically, adherents to this view argued that advertising is so powerful that it shifts consumer preferences and tastes (Kaldor 1950; Bain 1956; Comanor & Wilson 1974). By changing consumer pref- erences through advertising, the Market Power view argues that large advertising expen- ditures build competitive advantage by allowing for (artificial) product differentiation that is used to induce brand loyalty. the increased brand loyalty helps to make consumers less price sensitive and allows firms to charge high prices and make excessive profits at the expense of consumers (albion & farris 1980). the Market Power view also asserts that advertising is to be used to build a barrier to entry and will increase industry concentration ratios (taylor et al. 1996). In contrast, the advertising = Information school emphasizes the positive role that advertising plays in giving the consumer information on product features, prices and 341 edItorIal: evIdenCe tHat advertIsIng = InforMatIon quality, thereby enhancing consumer knowledge (telser 1964; Mcauliffe 1987). It is asserted that the increased knowledge provided by advertising both reduces search costs and forces producers to improve the quality of their products. With respect to industry concentration, the Information school predicts that advertising actually facilitates entry by allowing innovative products or product features to be effectively communicated to consumers (taylor et al. 1996). thus, competition is increased as consumers are pressured to improve products. Meanwhile, by allowing new products to gain rapid acceptance if they have an advantage, firms are allowed to exploit economies of scale and offer lower prices. thus, advertising lowers prices, rather than raises them. overall, according to the Information school, advertising spurs the economy and stimulates economic growth. In reading the deloitte (2013) report, it was striking how supportive it is of the advertising = Information school, as opposed to the advertising = Market Power school. While this editorial is not intended to provide a comprehensive view of the literature on the economic effect of advertising over the past few decades, it is, however, striking to me as to how the overwhelming majority of recent studies appear to be more supportive of the Information school. for example, Kopf et al. (2011), graham and frankenberger (2011), Chen et al. (2008) and Cheong et al. (2013) provide striking finding on advertisings role in economic growth and generally support positions of the advertising = Information school. also consistent with the Information schools position, taylor et al. (1996), Wilcox and gangadharbatla (2006) and Wilcox et al. (2009, 2012) found a lack of support for the notion that advertis- ing increases industrial concentration. additionally, multiple studies, including Kanetkar et al. (1992), Mitra and lynch (1995), Kaul and Wittink (1995) and Capella et al. (2009), find that advertising does not place upward pressure on prices. In spite of the above evidence that appears to largely refute the advertising = Market Power school, as observed by rotfeld and taylor (2009), numerous contemporary studies on various consumer issues appear to make opposite assumptions. I would urge research- ers across disciplines to take heed of these findings and avoid making assumptions about how advertising works that are not substantiated. reading the deloitte report is a good place to start to get a good overview of what we do know about the general economic effects of advertising. References albion, M.s. & farris, P.W. (1980) the impact of advertising on the price of consumer products. Journal of Marketing, 44(3), 1735. albion, M.s. & farris, P.W. (1981) The Advertising Controversy: Evidence on the Economic Effects of Advertising. Boston: auburn House. Bain, J.s. (1956) Barriers to New Competition: Their Character and Consequences in Manufacturing Industries. Cambridge, Ma: Harvard university Press. Capella, M.l., taylor, C.r., Campbell, r.C. & longwell, l.s. (2009) do pharmaceutical marketing activities raise prices? evidence from five major therapeutic classes. Journal of Public Policy and Marketing, 28(2), 146161. Chen, Q., He, Y., Zhao X. & griffith, d. (2008) sources of product information for Chinese rural consumers. International Journal of Advertising, 27(1), 6797. 342 InternatIonal Journal of advertIsIng, 2013, 32(3) Cheong, Y., Kim, K. & Kim, H. (2013) advertising and promotion budgeting during volatile economic conditions: factors influencing the level of decentralisation in budgeting and its relations to budget size and allocation. International Journal of Advertising, 32(1), 143162. Comanor, W.s. & Wilson, t.a. (1974) advertising, market structure and performance. Review of Economics and Statistics, 49(4), 423440. deloitte (2013) Advertising Pay: How Advertising Fuels the UK Economy. london: the advertising association. graham, r.C. & frankenberger, K.d. (2011) the earnings effect of marketing communication expenditures during recessions. Journal of Advertising, 40(2), 524. Kaldor, n. (1950) the economic aspects of advertising. Review of Economic Studies, 18(1), 127. Kanetkar, v., Weinberg, C.B. & Weiss, d.l. (1992) Price sensitivity and television advertising exposures: some empirical findings. Marketing Science, 11(3), 359371. Kaul, a. & Wittink, d.r. (1995) empirical generalizations about the impact of advertising on price sensitivity and price. Marketing Science, 14(3), 151160. Kopf, d.a., torres, I.M. & enomoto, C. (2011) advertisings unintended consequences: economic growth. Journal of Advertising, 40(4), 518. Mcauliffe, r.e. (1987) Advertising, Competition, and Public Policy: Theories and New Evidence. lexington, Ma: dC Heath and Company. Mitra, a. and lynch, J.g. (1995) toward a reconciliation of market power and information theories of advertising effects on price elasticity. Journal of Consumer Research, 21(1), 644 659. ornstein, s.I. (1977) Industrial Concentration and Advertising Intensity. Washington, dC: american enterprise Institute. rotfeld, H.J. & taylor, C.r. (2009) the advertising regulation and self-regulation issues ripped from the headlines with (sometimes missed) opportunities for disciplined multi-disciplinary research. Journal of Advertising, 38(4), 514. taylor, C.r. (2012) Back to the future: some topics we should not forget about in advertising research. International Journal of Advertising, 31(4), 699702. taylor, C.r., Zou, s. & ozsomer, a. (1996) advertising and its effect on industrial concentration: a contingency perspective. Journal of Current Issues and Research in Advertising, 18(1), 3544. telser, l. (1964) advertising and competition. Journal of Political Economy, 72(4), 537562. Wilcox, g.B. & gangadharbatla, H. (2006) Whats changed? does beer advertising affect consumption in the united states? International Journal of Advertising, 25(1), 3550. Wilcox, g.B., Kamal, s. & gangadharbatla, H. (2009) soft drink advertising and consumption in the united states 19842007. International Journal of Advertising, 28(2), 351367. Wilcox, g.B., Kim, K.K. & schulz, H.M. (2012) liquor advertising and consumption in the united states: 19712008. International Journal of Advertising, 31(4), 819834.
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