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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.
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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
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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
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Chen, Q., He, Y., Zhao X. & griffith, d. (2008) sources of product information for Chinese
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InternatIonal Journal of advertIsIng, 2013, 32(3)
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