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Advertising, Promotion, and Competition:
A Survey with Special Reference to Food
By John M. Connor·
Abstract
Th,s article surveys the theoretICal and empmcal hterature on the economIcs of advertIsing during
the last decade The survey notes several promlsmg advances 10 theoretIcal modehng of the role
of advertisIng 10 consumer choice and sOCIal welfare Numerous empmcal investigations of food
and other consumer products have estabhshed relationshIps between advertising and market structure
or performance mdlcators Less progress was found on selected SOCioeconomiC adverbsmg
Issues that are dIfficult for tradJtlonal economIcs to handle
Keywords
AdvertISing, Sales promotion, Market structure, Performance, Welfare economiCS, Consumer
chOice
Introduction
The study of the economIc role of advertiSing began only 30
years ago WIth a seminal paper by Kaldor (14) 1 AnalytIc
modehng of advertlsmg and related forms of sales promotion
has proved arduous and nearly Intractable The first crude
empmcal tests of hypotheses about advertISing began only
15 years ago Dunng the last 10 years, substantial progress
has been made In both the theoretical and empmcal economIc
literature,
In thIS article, I survey recent analyses of the economIc role
of adverbsmg and other types of sales efforts, fOCUSing
especIally on the socIoeconomIc and welfare effects of advertising
I consIder the role of adverbslng In determining the
quality of competition m markets for food and other grocery
products, The most recent survey of the welfare effects of
advertlsmg IS an article by Doyle (10), wrItten In 1968
Shaffer has also thoroughly surveyed the role of advertISIng
In food marketing firms (38) However, both articles are 10
part dated
After exanunmg the conventIonal distinction between
advertISIng as Information and advertiSing as persuasion, I
discuss several SOCioeconomiC Issues surroundmg advertIsmg
and survey the eVIdence regardJng five separate welfare
economIcs ISSues [conclude by assessmg the hterature and
making suggestIOns for future research
·The author IS an economist WIth the National Economics
DIVISion, EBB
1ItaliCized numbers In l?arentheses refer to Items lD the
references at the end of thl8 article
Information versus Persuasion
SeUers differentIate thell products from those of rival sellers
in four main ways space, fonn, semce, and unage Spatial
dJfferentlatlon occurs through selecbog convement plant or
store locations Form dJffenmtlatlon occurs when products
are altered phySIcally to create differences ID shape, navor,
color, durability, storabdlty, IngredJents, or packagmg Service
differentiatlon',s common In retad trade or In a product
that requires rep8lrs during its usable Iife_ Image dIfferentiation
involves the sublectlve ImpressIons of consumers about a
particular product, such as the kind of person who typIcally
uses that product_ Image dIfferentiation often occurs 10
conJuncbon With one or more of the other three kmds of
dJfferentlatlOn Labeling, packagmg, and advertISIng are the
pnnclpal means of Image differentiatIOn of products 2
It IS true that some, perhaps most, adverbsmg proVIdes mformatlon
about the tangible, oblectlve charactenstlcs of products
or serviceS offered for sale, facts that aid buyers In
conSCIOUS, rational declslonmakmg InformatIonal cues on
Ingredients, durablhty, pomts of purchase, and price are
charactenstlcs of classIfied advertlsmg, trade pubhcatlons,
and catalogs. However, much advertiSIng content appears
to be pnmanly "persuasIve" messages that are hIghly sub­
Jective, emotive, or even subconSCIOus In theu appeal Most
adverbslng through the mass medJa (partIcularly the elec­
2Enterpnses can also create Images whIch affect their
product or servtce offenngs Enterpnse dIfferentiatIOn
occurs mainly through spatial or serVIce differentiation
Food retatlers~ for example, employ store decor or color
schemes, checK-cashmg seroces, nutnbon counsehng) unique
private-label products, and other deVICes to differentiate theIr
ente!pnses DiversIfied food manufacturers, In contrast
usually offer a multipliCIty of brands that dISCourages the
development of a companY·Wlde consumer unage
AGRICULTURAL ECONOMICS RESEARCHI VOL 33, NO 1, JANUARY 1981 19

tromc medIa) IS preponderantly persuasIve Other massmedls
advertising contaInS a more equal mlXture of mfor·
mative and persuasive elements, newspapers, billboards, and
magazmes are often of thIS type (35) Some forms of sale,
promotIOn are largely persuasive (coupons, sweepstakes. and
mcentIves), whereas others are partly mformatlve (free
samples and sales demonstratIons)
The proportion of mformatIon contaIned In advertIsmg
vanes not only by medIUm but also by type of product_
Some products have been assocIated WIth hIstorIcally Intense
and uninformative advertiSing [terns relatmg to personal
care (razors, soaps, and deodorants) are suscepbble to adver·
tlsements emphaslzmg the product's abIlIty to reduce feehngs
of personal msecunty The advertlsmg of lUXury products,
like perfumes, furs, or Jewelry, IS onented toward lDcreasmg
SOCIal status Some foods and beverages have lost theIr function
as necessIties or sources of nutntIon alone "Dietetic"
foods and chewmg gum, for example, are valued less for
theIr hfe-sustamlng attrIbutes than for thell organoleptIc
properties Many foods are consumed In 8 CODVlVlal or
ceremomal settmg and are thus more prone to hIghly persua­
Sive advertiSing There IS 8 world of difference between a
sack of flour and a bottle of champagne 10 theIr potentIal
for bemg Image-dIfferentIated
Most packaged and branded grocery Items have properties
that lend themselves to substanbal adverbsmg expenditures
relatIve to sales One of the most comprehenSIve studIes
of the determmants of advertlSlng IntenSIty was recenUy
pubhshed by FarrIS and Buzzell (11) Based on the lOternal
records of 281 consumer hnes of bUSiness, ,they found that
the ratio of advertlsmg and promotion expendItures 3 to sales
was posItively and Significantly related to standardizatIOn
(not speclal-ordered), mfrequency of purchase, small umtpurchase
value, proportIon of sales to dlstnbutors (as
opposed to dIrect sales to final consumers), and proportIOn
of new products marketed by the busmess Except for Infrequency
of purehase, all these charactenstICs are tyPICal
of packaged, branded grocery products Consequently, the
advertISIng mtenSlty of processed food and tobacco products
IS relatIvely hIgh Media adverbsmg by food manufacturers
alone averages well over 3 percent of sales If one
excludes hIghly penshable products, food retaIlers spend an
addlhonal 1 percent of their sales on advertlsmg (7) Other
3These expenditures Included media advertlsmg, catalogs,
exhibits, premiums, coupons, free samples, and special
promotlOnal discounts The costs of field sales forces were
not Included
fonns of sales promotion such as coupons, mcentIves,
samples, and some dIrect sales force actlVlty would probably
raISe the mtenSlty of advertlSmg to 8 percent of sales
The InformatIve content of advertISIng IS at the heart of
diSCUSSions on the SOCial and economic value of advertJsmg
Theones of adverbslOg developed by StIgler (41), Telser
(43), and Nelson (22) assume that consumer expenence WIth
a product should eIther remforee correct prepurchase mformatIon
or mvalldate false mformatlon The market wIll
ImmedIately dlsclphne all false advertismg through a loss of
market share to sellers Moreover, these theoretical models
conclude that firms with unknown products and those offer­
Ing the best qualIty/prIce combmatIon are the ones that
advertISe most WIth purely factual or mformatIve advertlSmg,
the effects of advertISIng are umformly welfareenhanCIng
Consumer search costs would be SIgnIficantly
lower With mfonnatlve mass adverhsmg than With searches
mvolvIng mdlVldual tnal consumptIon or testing As sellers
have no IncentIve to deceIve WIth advertISIng, the StIgler­
Telser-Nelson models Imply that competItIve market performance
IS enhanced If consumers Simply choose the most
heaVIly advertIsed products
LIttle empmcal eVIdence exISts on the mformatlve content of
advertlsmg, but one Imtlal effort mdlcates very low levels for
teleVISIon advertlSmg 4 Resmk and Stern (31) examIned 378
randomly selected teleVISIon commercIals (78 percent of
whIch were grocery products) for 14 dIfferent informatIonal
cues Only 45 percent of the commercials for grocery products
contamed even one mtonnatlonal cue, the rest were
deVOid of Informative content Prehmmary results of research
by the same authors on other medIa IndIcate a hIgher proportIon
of mformatlve adverusements EmPIriCal eVIdence
combmed With more recent theones cast some doubt on the
sangume conclUSIOns of the StIgler-Telser-Nelson research.
More recent models generally assume that consumers cannot
costlessly and ImmedIately vahdate the qualIty of a purchased
product WIth absolute certamty Kotowltz and
4Parker and Connor (26) calculated that In 1975 approxImately
one-fifth of all mass-media advertlBlDg expenditures
for all (SIC 20) manufactured foods was "excesslve"-that lB,
nomnfonnatlve Their method, admittedly huddy conJectural,
diVided the 130 food product classes Into those that
were competitive and those that dId not meet the competitive
concentration standard (40 percent four-firm seller concentration
ratio or less) They then calculated the mformatl've
advertlsmg-to.sa]es ratIo for 'hoae c1..... (0 53 percent) and
netted that amount from all other product classes The
remaInder was conSidered excessive KaIdor (14) IDdepen~
tiently arrived at a slJ1ular mformatlOn proportion of advertlsmg
costs
20

The mformatlVe content of adr;erhsmg IS at the heart of
dJScuss,ons on the soeml and economIC value of advertISing
Mathewson (15) have mvestIgated the relatIonshIp between
"correct" (nondeceptIve) advertIsing and monopoly Their
theoretIcal model assumes the eKlstence of a nondlscnmmat­
Ing monopohst and consumers whose consumptIon IS
affected posItIvely by the consumptIon of other consumers
(the "demonstration" effect). Under these conditions, the
equlhbrlUm result IS that the seller expends more than the
socIally optimal amount on advertISIng and SImultaneously
provIdes too little total 10 formatIOn to consumers ThIS
model demonstrates a key hnk between advertismg, mformatIve
content, and the welfare erfects of Imperfect competItIon
When consumers are imperfectly mformed about products,
the market does not maxUnlze SOCIal welfare Smallwood and
Conllsk (39) have presented a model 10 whIch consumers
know the pnce of products and the pnces of all brands are
held equal, but consumers are uncertain about product qualIty
untIl use (tbat IS, mspectlOn pllor to consumptIon cannot
reveal quality, as IS true of most packaged consumer goods)
Smallwood and Conhsk's model, budt on an adaptive dynamIC
searcb strategy, results ID alternative eqUlhbna, two of whIch
are InterestIng FIrst, even though pnces are the same, eqUlhbna
eKlst for which several dIfferent qualIty I"vels of products
sUrvive 10 the market Second, It Is pOSSIble, under some
reasonable conditions, for a brand of "mferior" quality With
an InitIally hIgh market share to capture the entIre market
over bme
A second artIcle by Kotowltz and Mathewson (16) IS also
based on a consumer adapt,ve-search strategy Their model
assumes that (1) rational consumers are Ignorant, but tractable,
about product qualIty, (2) tastes are formed and fixed
with respect to product attnbutes; and (3) advertISIng does
not alter tastes, but does alter perceptIOns about a qualIty
attnbute that reqUIres continuous, prolonged expenence to
evaluate In thiS model, while false advertiSing claims are
eventually mvalldated, the speed of dIScovery depends on the
consumer's ablhty to learn and remember It can be profitable
In the long run for 8 monopolist to mislead consumers,
at least for a penod of bme, by glvmg them mcorrect qualIty
mformatIon Although the authors cannot make any unambiguous
welfare conclUSions for margmal consumers, all mframarginal
consumers expenence a loss because the monopolist
substItutes adverbsmg clBlms about product qualIty for true
quality
Unresolved Issues
There are several Issues related to the perceived SOCial erfects
of advertlSmg Some he outsIde the tradItIonal domalD of
economICS The rest are baSIcally unresearched questIOns In
general, less progress can be cited m setthng these Issues than
the welfare economics issues I diSCUSS later However, the
tOPICS are suffiCIently Important to be conSIdered here
First, It IS sometImes cl81med that advertIsmg Increases macroeconomIc
stability because of countercychcal adverbsmg
expendItures by sellers and the resultmg stabilIzatIon of
consumer aspirations over time Scherer's (36) survey of thiS
Issue finds that adverbsmg expenditures show a deflmte
procychcal pattern Moreover, empirical studIes of the effects
of adverbsmg on aggregate consumption have YIelded mconslstent
results Thus, the eVidence on dynamiC stabilizatIOn IS
mconcluslve.
Second, some of the "mfonnatIon It conveyed by advertiSIng
IS deceptIve or at least IDlsleadmg m a legal sense_ There are
voluntary US mdustry groups whose regulations hmlt
deceptIons, such as the NatIonal AdvertlSmg RevIew Board
State and Federal Government agencIes enforce laws agBlnst
deceptIve and fraudulant advertISIng clBlms Although these
efforts have largely ehlDlnated blatant deceptIOn, omISSIOn of
relevant facts, innuendo, obvIOUS exaggeratIOn, and puffery
are typICal features of modem advertlslng Preston's book on
puffery (29) CItes scores of examples of food advertIsements
contmmng puffery statements lIke "Milwaukee's finest beer,"
"the biggest lIttle treat In all the land," and "every body
needs mIlk" Sucb phrasmg IS not Illegal, but Preston argues
that It may mISlead some consumers and must have some
effect on purchaslDg patterns At least, the frequency WIth
which such seemingly irrefutable phrases appear in advertlSlDg
copy arouses cynicism among some sellers and consumers
about the truthfulness of advertising (36, p_ 3S0)
Third, advertising IS critiCIzed sometimes for IDstilling or
entrenchmg hedomstic values Food advertISIng, for example,
often OlDlts facts about health or nutritIOn but
Includes assertions about sensual characteristics Some
cntics perceive a connection between the rise of hedOnism
and the appearance of modern advertiSing In Western societies
Yet counter-examples also abound (wartime exhortatIOns,
antlSmokmg campaIgns), and SCltovSky (37) has woven an
elegant argument that, despIte hIgh levels of advertlSlDg, U S
consumers habItually underachIeve 10 pleasure-seekmg relabve
to cItizens of other countnes
Fourth, adverbslDg may substantIally arrect natIonal food
chOIce By raISIng pnces on heaVIly advertIsed products,
many consumers are forced to SUbstitute less deSirable brands
10 the same product category AdvertlSmg probably shIfts
21

mtenndustry demand as well as mterbrand demand In the
long run AdvertISing may be partially responsible for the
notable shift m preference away from milk, frwt JUIces,
and water (which are less adverbsed) to artificially fruitflavored
dnnks, soft dnnks, tea, and alcohohc beverag~s
(all of which are heaVily advertised) Indeed, Mottern (19)
has presented some eVidence suggestmg an association between
heavy advertlsmg and poor nutfitlOnal charactenstIcs of
foods
Finally, there IS the questIOn of Interdependent utlhty
functions Much advertlsmg seeks to lead consumers to
compare thell own well-bemg with that of other consumers,
It urges them to emulate the consumptIOn patterns of those
they admire Consumer utlhty thereby depends on others'
perceived consumption habits as well ~ on the mtnnslc
charactenstlcs of the products or servIces, thus generatmg
external effects m consumption Thus, some advertlsmg first
creates dISSatISfaction In potential consumers which can
only be removed by purchasing the advertised commodity,
bnnglng consumers back to thm onglnal level of satisfactIOn
(pnor to the assault on their preference structure by the
advertlsmg) It IS doubtful that advertlsmg which contams
only messages of status discontent can ever result In a net
mcrease m consumer satisfaction
Issues of Welfare Economics
Doyle (10) has Identified five maJor,lssues of welfare economics
mvolvmg commercial advertIsmg, especially the
persuasive kind
1 Its relationship to monopoly market sJructu!es,
espeCially barners to entry, and concentratIOn,
2 Its Impact on profits, prIces, market share stability,
and other Indicators of market power,
3 Whether It stimulates or retards technological
progress,
4 Its relationship to guarantees of product qUality,
5 The extent to which It cross-subSidizes the entertamment
media
Market Structure
Here we conSIder the relationships of adverbsmg and promotIOn
to concentratIOn, economies of scale, and other bamers
to entry EmplncaJ tests of relatIOnships have frequently
used the ratio of media advertlsmg to sales as a proxy for the
degree of product differentiatIOn, assuming that other sales
promobon efforts are correlated With advertosmg The advertising-concentration
relationship IS one of the oldest and
most frequently exarmned tOPICS m mdustnal organizatIon
research A recent survey by Coman or and Wilson (5) concluded
th.t the dllecbon of causality depends on the samples
or bme penod studied A recent test by Ward and Behr
(44) found a strong positive relatIOnshIp for consumer nondurable
mdustrles In several tIme'penods, an exarrunauon'of
the food'mdustnes f.lled to find any rufferenee from'the
consumer nondurable Industnes USing a slmultaneousequatIons
model of structure and performance In the food
manufactunng mdustnes 10 1967 and 1972, Pagoulatos and
Sorenson discovered that advertiSing intensity was strongly
and pOSItively associated WIth market concentratIOn (25)
Analyses of concentratIOn and advertlsmg mtenslty are IDcomplete
m mdlCatmg the level of competItion because the
level also depends on the eXistence of nonadvertISIng barners
to entry
Advertlsmg may be related to another element of market
structure--economles of sca1e m production It has been
agrued that adverbsmg expands a firm's sales and thereby
allows attamment of the optimal scale of production Neither
Scherer (35) nor Doyle (10) beheves there IS any emplDcal
eVIdence for thiS hypotheSIs, mdeed, gIven that adverbsmg
mtenslty IS related to phYSIcal product dlfferenbab~n,
numerous product vanebes, planned obsolescence, and consequent
short production runs, the reverse IS lIkely true
Connor (6) has establIshed that brand prohferabon among
processed foods 15 Significantly and directly related to media
advertlsmg mtenslty However, these findIngs ~er,!r to'smgleplant
economIes, It IS pOSSIble that advertlsmg and promotIOn
may give nse either,to pecumary advantages to size or
to multiplant economies of scale Scherer arid others suggest
that, for two grocery-products mdustnes, optlm~ US
multIplant scales are reached at the two- to five-plant level
due to advertlsmg and Image differentIation alone
Most research pomts to substantial econoDlles of scale
In advertiSing Itself That IS, as the amounts of advertIsmg
and promotion mputs In a finn are Increased proportIonately
With other productIOn and marketmg mputs, output (sales)
mcreases more than proportIonately over a certaJn range
Strong eVidence eXIsts for substantIal economies of sca1e for
beer (27) and cigarettes (2) 5 For a large sample of consumerproduct
hnes of busmess, Fams and Buzzell (11) found that
market share was mversely related to the Intensity of adver­
5 AdvertIsmg capital IS used In these studies For foods
and most consumer nondurables, annual depreclillion I.ltt'~
were found to be ID the range of 30-80 perc('nl
22

The aVallable eVIdence supports the hypothesIS that hIgh
advertJSlng mtenslty leads to above-normal profits m food
manufacturmg, however, comparable studies are not
avaIlable for other stages of the food markehng system
tlslng, even after controlling for several other factors The
Nielsen Researcher (24) found that brand market share and
brand advertising share were pOSItIvely and closely correlated
for 60 grocery store brands In 20 product classes, however,
except for brands With a low-pnce image, advertiSIng share
tended to exceed market share Economies of scale In advertISing
anse from two pnnclpal sources pecuDiary and technolOgical
economies (4) First, volume discounts appear to
persISt for specific kinds of media advertising, particularly
the electromc medIa and national magazInes Also, some
media events-for example, the Olymplcs-are lumpy (infrequent
and unusual), which can give advantages to the
leading firms In an Industry when bidding for chOice advertIsing
slots Second, advertISing effectIveness (the number
of messages of equal buyer Impact) may be less expensive
at larger volumes than amaller SometImes thiS effectiveness
can be attnbuted to the use of national rather than local
media, to the eXistence of a threshold effect In advertIsmg,
or to the advantages of haVing a "full line" of products over
wluch the advertISIng of a hmlted number of brand names
can be spread
Economies of scale lD advertlslDg Imply substantial barners
to entry by small firms Their successful entry Will reqwre
much higher advertlSlDg-to-saies ratIos initIally than those for
the established firms lD a market, the costs may be so high
that entry IS unprofitable for months or years Moreover,
mtroducing one brand moo a consumer goods market on a
national scale may require an initIal advertlsmg Bnd promotIon
budget of several mllhon dollars (7) Fmanclal mstItutIons
wlll not usually lend a newcomer funds for thIS purpose,
hence, new-product launches can constItute an absolute
capIW barner to entry_ Large or diversified firms are the
pnnclpal sources of new food products, and their relative
ease In overcomIng promotIonal entry bamers IS doubtless
one of the reasons (6)
The general conclUSion about advertiSing as a cause of high
entry barners must be modified for retall and semce operations
(4, 35) ThIS qualification rests malDly on research
companng pnces and quahty of optometry semces across
CitIes With different rules govemlDg advertlsmg Poces are
Significantly lower 10 areas permitting advertISIng, whereas
few differences eXISted 10 the quahty of the goods and ser­
Vices (I) Thus, advertiSing by food reWlers may IIld entry,
but there are as yet no speCific studies on thIS subject
Ultimately, the most Important Impact of advertising on competitIOn
may be on the longrun alteratIon of market structures
In one detruled study, Mueller and Rogers exammed
the relatIOnship of advertlsmg to changes In seller concentratIOn
10 the U S manufacturing mdustnes (21) Recently
rephcated for the food mdustnes by Rogers (32), these results
indICate that, ceterIS paribus, intenSive advertlSlng (especially
on radiO and teleVISIOn) caused concentratIOn to lise over
the 1958-72 penod Without advertiSing, "natural" compet­
ItIve forces would have eroded market concentratJon Mather's
stody In 1979 proVidessome inSight Into one type of conduct
associated With concentratIon change (18) Ills study of 68
mergers of food firms dunng the 1967-76 penod confirms
that advertiSing expenditures rose more than 50 percent In
the 2 years follOWing the merger, especially after productextensIOn
type mergers Taken together, these last two studies
suggest why conglomerate mergers IDvolvmg consumer goods
firms may restructure markets
PrIce and ProfIt Performance
AdvertiSing lDtenslty, while not an entirely satISfactory
proxy, has been used to represent the extent of product
differentiation 10 a market It IS also assOCiated With basiC
product charactenstlcs, such as durablllty, consumer versus
producer goods dlstmctIon, mdustry media ChOIces, and
manufacturer-retaIler power relatIonships The most ngorous
studies mdlcate that both brand and Industry pnce elastIcItIes
of demand are lowered by advertiSing That is, advertISing
creates consumer loyalty, remforces repeat-purchasing
patterns, and allows firms to rruse pnces (wlthm hmlts) relative
to those of nvals With little erosIOn of sales_ Over tIme
nval firms may respond With advertiSing campaigns of their
own to preserve their share of the market and mlllntam their
profits_ In an oligopohstIc market,· strategic consideratIOns
lead to 8 SituatIOn in which firm advertlsmg expenditures are
made largely to cancel out nval adverbslDg messages Under
pure monopoly or perfectly coordmated, Jomt·profit maxlnuzatJon,
total advertJsmg expenditures would be much
lower than 10 a loose oligopoly (35) Some of these con­
Siderations may underhe the voluntary adverbsmg restnctions
ID some mdustnes, such as the U S liquor mdustly
FIrm or brand loyalty combmed With effective market-entry
bamers can Insulate firms from competIbon The eXIStence
of market power can be mferred from studies showmg that
high profits an! pOSitively and Significantly related to concentratIon,
advertiSing, and other market structure dlmenslons_
Many such "profits-structure" studies have been performed
for the manufacturing mdustnes, four of these have exammed
the advertlsmg-profits relatIOnship for the food manufacturing
60ne In which 8 few sellers dominate
23

mdustnes Parker and Connor,(26) found that advertlsmg
mtenslty had sIgnificant, pOSItIVe effects on the 47 food
lOdust"es' pnce-cost margins for 1972 Vsmg 1950-54 data,
the Federal Trade CommISSIOn (FTC) (12) found the same
strong relationshIp from the 97 largest food manufactunng
firms Vsmg 1967-72 data, Rogers (33) replicated these results
for a SImIlar sample of 60 firms A fourth preilmmary study,
USing a Simultaneous equatIon model, estimated a Significant,
POSitive Impact of advertiSing and concentratIon on profits
for the food processmg lOdustnes 10 1967 and 1972 (25)
The avadable evIdence supports the hypotheSIs that hIgh
advertlsmg mtenslty leads to above-nonnal profits 10 food
manufactunng. however, comparable studies are not aV81lable
for other stages of the food marketing system 7 These strong
results are consistent With an Important analysIs by Porter
that found that both the concentratIOn-profits and advertlSlngprofits
relatIOnshIps were strongly pOSItIVe In those manufactunng
mdustnes marketmg thell products through self-semce
stores ilke grocery stores (28)
By confemng market power on finns, advertlsmg should
lead to hIgher pnces 10 the affected markets PrIce enhancement
has tradItionally been more dIfficult to establish
because appropnate pnce data are lackIDg However, one
empmcal test relates the 1976 pnces of a large sample of
advertIsed processed foods to market structure and other
factors, the standards of companson were the pnces of eqwvalent
pnvate-Iabel foods, whIch were assumed to be produced
by sellers and dlstnbuted through channels deVOid of market
power (26) Results showed that, cetens panbus, medIa
advertiSing intensity had 8 Significant, poslbve Impact on
wholesale pnces, for each 1-percent Increase In the advertlsmg-to-sales
ratIO, wholesale pnces rose about 0 9 percent
Furthennore, the proportIon of network teleVISIon advertlsmg
relative to total elght-medlB expendItures had a slgmficant,
positive Impact on prices On average, processed,
branded food pnces were apprOXImately 8 5 percent hIgher
than pnvate label equIvalents because of med,a advertiSIng
alone 8 ThIS IS conSIderably less than the pnce differentials
for speCIfic, hIghly advertISed, hIgh market-share grocery
7The FTC study found that profits on assets were rwed
by about 1 1 percentalle POints for each 1-percent mcrease m
advertlslng-to-saJes ratio Rogers' results were about 1 5
pomts on w;sets, Pagoulatos and Sorensen calculated a lIto
1 O-percentage pomt Increase In sales, whereas Parker and
Connor's results were 2 9 percentage POints of sales These
elastiCities were calculated at the approxunate mean values
for the advertlslng-to-sales ratlos
8 Average four-film media advertunng-to-sales ratios were
2 7 percent, and the average network TV proportion was
o 35 percent (26, table 3)
products CIted by Scherer (35) 9 It IS more than the 2-percent
dIfferential to all coilsumer produce reckoned by Doyle (10)
S,milar studIes of retall grocery pnces have not conSIdered
the effects of retader advertlSmg on pnces SpatIal and
semce differentiatIOn (Wide msles, modem stores, and 10­
store delicatessens) are probably more Important deter­
Illlnants of store-ta-store pnce differences Wlthm SIngle
markets (17)
Market share mobIlity IS an mdlcator of mdustry performance
Generally, data on market-share changes are difficult
to obtam, when employed, they should be confined to a
smgle market and should represent a total finn's share of the
market VslOg reliable data, Reelue found that market share
mstablllty among 34 finely defined, food product classes was
SIgnIficantly and pOSItIVely related to advertlsmg mtenslty
(30) ThIS study's results are contrary to all the other findings
on profit and pnce perfonnance quoted above, but because
Reelue used brands rather than finn shares and failed to control
for new product mtroductlons, the findings should be
venfied WIth others before bemg accepted
TechnolOgical ProgressIveness
The concensus of the most recent, ngorous em pineal studIes
of technolOgical progressIveness IS that a low to moderate
amount of market power optimIzes the rate of progress (35)
These studIes typIcally measured technolOgical output by
research and development (R & D) expendItures (really an
"lOput" measure), patent awards, SCientific publlcatlons
by employees, or simllar measures Moderate finn Size and
some degree of market concentration are held to reduce the
nsk assOCIated WIth returns to R&D effort, these factors
may also enhance a finn's cash flow, part of whIch can be
d,verted to R&D uses Of course, factors other than market
structure, such as technolOgical opportUnity, also playa role
ln detemllnmg technolOgIcal advancement
To the extent that advertISIng reduces unpredIctabIlity m a
finn's market envIronment, It may also encourage technolOgical
output, espeCIally advemsmg assOCIated WIth the
mtroductlon of new products (35) Doyle (l0) argues that
nonadvertIsmg factors are stronger mfluences over aU
Only one empmcal study IS available on the progresslVenessadvemSlng
relatlonslllp for food manufactunng finns
Mueller, Culbertson, and Peckham (20) used IDdlVldual finn
data from two penods, 1950-56 and 1967-74 They employed
three measures of progresSIveness R&D expendItures, R&D
9The examples mentIoned by Scherer Include, Realemon
(30 percent hlgher), Clorox bleach (45 percent), and B study
of 217 drugs (67 percent h,gher)
24
•

Results showed IfuJt medUJ advertISIng mtenslty fuJd.
slgruflcant, posItive Impact on wholesale pnces, (or each
I-percent mcrease In the adverttsmg-to-sales rotlO,
wholesale prices rose about 0 9 percent
employment, and patent output Their results showed that
the advertIsIng-to-sales rabo had a signIficant, posItive Innuence
on progressiveness In the latter penod, for patent
output, advertlsmg mtenslty peaked at about 7 percent As
expected, firm Size, dIVersificatIOn, and concentration w;ere
consIstently sIgnIficant factors, firms wIth about $125-$150
mllhon total assets (1967 dollar value) had the hIghest rate
of techmcal output
Product QualIty
Some Image differentiatIOn may be necessary to motivate
manufacturers or dlstnhutors of consumer goods to mruntam
adequate quahty standards Slmple'trademarklng or labehng
may be sufficient to ensure mIn}mal quahty standards for
repetitively purchased goods (35) But mere brand IdentIfication
or frumiaanty require only minimal levels of advertISIng
or sales promotion Whether consumers can use heavy promotIOn
as a guIde to hIgh qualIty products IS senously doubted
by most economIsts (10) No doubt, for some products,
many consumers use heavy advert~slOg as well as high pnces
as a Sign of high quahty Double-blind expenments of some
food products h~ve shown that consumers usually cannot
distinguish average-priced from premlum-pnced Items (35,
p 382) Thus, their wllhngness to pay hIgher pnces for more
expensive equivalents IS apparent1y due to the aura, Image, or
status assocIated wIth the brand Shaffer has called th,s the
placebo effect of advertISing (38)
If pnce dJffe.rences between natIOnal brands and first-hne,
pnvate label rood products are any gUide, (.onsumers are
Willing to pay 10-15 percent more for the nabonal brand
(17) Some consumers may choo-se more expensive versIOns
because of perceIved nsk-averslO.!1, that IS, pnvate-Iabel
products may be of eqUIvalent quality on average, but theIr
quality may be more vanable Some consumers may try one
of the earlIest brands to appear on the market, Identify Its
partIcular configuration of characteristiCS as the standard
of qualIty, and contmue to purchase the onglnal product
because succeedmg brands seem "different" Such habituatIOn
processes are well understood In the field of psychology, but
have not been well IOtegrated mto economic models of con
sumer behaVIOr (40)
EVIdence on quality differences among brands of foods In the
same product categories IS scanty, moreover, such data as do
eXist depend on subjectively chosen weights for each charactenstlc
c4:?mprlsmg the overall quality mdex One way of
calculating qualIty IS to compare natIonal brand foods wIth
pnvate-label ImitatIOns Parker and Connor (26) reVIewed
data from laboratory-type tests and found no systematIc
quality differences Another source of qualIty compansons
IS the Consumers Volon (8), whose tests comblOe objectIve
phYSical measures of food quality (SIze umfonmty, color
IOtenslty, and VISCOSity) With blind tastlOgs by a consumer
panel (for flavor retentIon and l!,1gredlent balance) Test
results over the years have mdlcated few differences m
average quality between national brands and the first-hne,
pnvate-Iabel products 10 The mam differences appear to be
pnce, packaging, and advertlsmg
Medlll Cross-SubSIdIzatIon
The SUbSidization of news and entertamment In the mass
media IS perhaps advertISIng's major benefit to consumers In
the Umted States, about 70 percent of gross newspaper
revenu_es, over 50 percent of general penodlca1s revenues, and
viitually all revenues of the commercial radiO and teleVISion
networks come from advertISing (35) After deductIOns for
mcreased costs due to producmg the advertIsmg space or
time, these media stili have a net subSidy
Cross-subsIdIzatIon IS not a net loss to cC!nsumers who pay
for advertIsmg through theIr purchases, I t IS pnmanly a
transfer payment Doyle (10) belIeves that mcome IS transferred
from the nch to the poor through the croSS-SUbSidIzatIOn
of teleVision, but the redlstnbutlOn IS regressive for
newspapers Nonusers of the mass media lose the most
Heavy users of subsidized media who enJoy adverbsmg as a
craft or diversIon gam the most
Fmally, because advertlsmg IS a JOlOt product with the media,
there IS no separate market for evaluatmg advertIse.r:nents
ExceSSive SOCial mvestment In advertIsmg IS lIkely In some
medIa (28), espec18l1y those assOCIated wIth ohgopoly (9)
ConclusIOns
TheoretIcal models of consumer chOice, monopoly, and
welfare and their relationships to advertJsmg became increas­
Ingly ngorous dunng the seventIes Along wIth analytIcal
ngor has come the necessarily restrictive assumptions that
blunt the generalIty of the models' conclusIOns Notable
advances have been made m model 109 the psychological
process of habituation within an adaptIve-dynamic framework,
but other psychologIcal aspects of consumer chOice
have not yet been mcorporated, the "placebo" effect of
advertlsmg,ls an example Th-e concept of advertlsmg as af­
10"Genenc" private labels generally test out at a lowerquality
level
25

fectmg consumer perception of product-qualtty attnbutes
seems more proIDlSlDg than were earlier treatments of advertising
~ an mfluence dIrectly arfectmg the structure of mdlvidual
tastes Fmally. further refinements may be needed for
the distinctIOn between the mformatlve versus the persuasive
content of advertISing and the treatment of product qualIty
The empmcal tests of the past decade have fdled a vOId.
Most preVIous research on advertIsmg, mcludmg that by the
US Department of Agnculture (for example, 23) dealt WIth
measurements of the sales-mcreasmg effect of advertIsmg
Research on advertiSing effectiveness Is'currently camed on
by marketmg economists In business schools, corporate
economiSts, or researchers concerned With genen-c advertiSing
(for example, 45) Research on the Industnal orgaruzatlOn
aspects of advertiSing has reached (rurly sophISticated levels
regardmg data reliabIlity and methodoloillcal refinements
Attempts to measure the mfonnatlve content of advertlsmg,
however defined, and the welfare benefits of advertIsmg are
stIli rudImentary It may be that the "liberal" (Paretlan)
foundations of welfare theory are unsUitable for such mqullj"
The theoretical and empmcal stud,es published tbus far offer
no more than the most general policy gwdelmes We know
that mtenslty of advertIsmg IS associated With high concentratIOn,
high profits and pnces, and mcreasmg concentratIOn
But thIS knowledge does not help us much In'pollcy formula·
tlOn Even If the standard welfare analyses conclude that
advertlsmg IS "wasteful" or "excesslve/' the answer may not
be to restrIct expenditures Advertlsmg IS but one Conn of
product differentiation, a highly fungible and multifaceted
phenomenon The recent U S expenence With restnctions on
cigarette advertLsmg demonstrates the folly of a slOgie-medlUm
approach, Our mabillty to arnve at a consensus on how to
Identify the mformatlve content of advertlsmg IS another
Impediment to policy fonnatlOn If the problem IS one of too
little mformatlOn, publIc programs can supplement or supplant
pnvate ones, If there IS too much mformabon, counteradvertlsmg
actiVities may be a solution
Perhaps, as Shaffer (38) has suggested, researchers have been
askmg the wrong questIOns about the economJcs of adver·
llsmg Even If advertlsmg does convey useful mfonnatlOn for
rational declslOnmakmg, the more relevant questIon may be
how advertIsmg compares With other channels of dlssemma·
bon Slml1arly. If advertlsmg and sales promotion do fuel
market power, how can society deal With the mcome-redlstnbutlon
effects of advertlsmg?'Glven that advertising affects
SOCial beliefs and values, the more baSIC questions might be
Who should control advertlsmg content, and are the present
values projected by advertlsmg consonant WIth the Ideals of
a democrabc society?
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In the ProfeSSIOns The Case of Optometry Wasbmg.
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(2) Brown, Randall S "Estlmatmg Advantages to Large­
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(3) Butters, G R "Survey of AdvertISing and Market
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26

The SubSldlZatlon of news and entertamment En the mass
medIa IS perhaps advertlSmg's major bene{Jt to consumers
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27