339339International Journal of advertising, 32(3), pp. 339–342© 2013 advertising associationPublished by Warc, www.warc.comdoI: 10.2501/IJa-32-3-339-342

EditorialOn the economic effects of advertising –evidence that Advertising = Information

Charles r. taylorVillanova 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 economiceffects of advertising is needed (deloitte 2013). While I have addressed this before in thisspace (see taylor 2012), the striking findings of this report underscore the need for moreattention to be paid to this general issue. It also occurs to me that an existing frameworkfor examining the debate over the economic effects of advertising should be invoked morefrequently, but more on that later.

the ‘advertising Pays’ report, commissioned and published by the advertisingassociation, is available online. I believe that it is important for everyone in the advertisingfield to be familiar with the issues addressed in the report and would encourage you toread 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 advertisingassociation is the owner of this journal.

some of deloitte’s key conclusions based on econometric analysis and a series of casestudies are:

• advertising fuels the economy and is a driver of economic growth. for every £1 billionspent on advertising in the uK, a £6 billion increase in annual gdP ensues.

• advertising provides information that: 1) helps consumers compare products andprices; 2) connects companies and consumers; and 3) informs purchase decision.

• advertising plays an important role in spurring information by bringing innovativeproduct to the market and playing a role in building brands in a way that protects theinnovation.

• 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 societythat has an economic value.

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While several, if not all, of these findings may come as no surprise to those in theadvertising field, the report suggests that society as a whole often loses sight of the con-tributions made by advertising, stating (p. 10):

advertising’s contribution to the uK economy is often lost among narrower debatesabout the industry. to help address this imbalance, the advertising associationcommissioned deloitte to examine the economic impact of advertising in the uK.

While I would stress that some of the ‘narrower debates’ around advertising’s role insociety 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 tohold true. as Herb rotfeld and I observed in an article in Journal of Advertising publishedin 2009, too often, articles on current issues such as public health (e.g. obesity in society;prescription drug promotion practices; alcohol consumption), high consumer spendingand debt, privacy issues, public aesthetics, etc., advocate regulating advertising as a solu-tion to problems. this is done without actually exploring the underlying mechanisms viawhich advertising works and, especially, issues related to the economic and societal effectsof advertising (rotfeld & taylor 2009).

In my opinion, one of the greatest, yet underappreciated, pieces of work in the historyof the advertising field was a book by Mark albion and Paul farris published in 1981titled The Advertising Controversy: Evidence of the Economic Effects of Advertising. the sameauthors also published a related article in Journal of Marketing in 1980 that had a specificfocus on advertising’s impact on pricing. In their book, albion and farris introducedthe notion that there are two primary schools of thought on the economic effects ofadvertising: the advertising = Information school and the advertising = Market Powerschool.

the two schools provide very opposing views of advertising’s impact on the economyand society.as outlined by ornstein (1977,p. 2), the ‘advertising = Market Power’school’scentral 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.theresult is restricted output, raised prices, inefficient allocation of resources, long-run excessprofits of monopolists, and distortion in distribution of wealth.’ Historically, adherents tothis view argued that advertising is so powerful that it shifts consumer preferences andtastes (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 thatis used to induce brand loyalty. the increased brand loyalty helps to make consumers lessprice sensitive and allows firms to charge high prices and make excessive profits at theexpense of consumers (albion & farris 1980). the Market Power view also asserts thatadvertising is to be used to build a barrier to entry and will increase industry concentrationratios (taylor et al. 1996).

In contrast, the advertising = Information school emphasizes the positive role thatadvertising plays in giving the consumer information on product features, prices and

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quality, thereby enhancing consumer knowledge (telser 1964; Mcauliffe 1987). It isasserted that the increased knowledge provided by advertising both reduces search costsand forces producers to improve the quality of their products. With respect to industryconcentration, the Information school predicts that advertising actually facilitates entryby allowing innovative products or product features to be effectively communicated toconsumers (taylor et al. 1996).thus, competition is increased as consumers are pressuredto improve products. Meanwhile, by allowing new products to gain rapid acceptance ifthey have an advantage, firms are allowed to exploit economies of scale and offer lowerprices. thus, advertising lowers prices, rather than raises them. overall, according to theInformation school, advertising spurs the economy and stimulates economic growth.

In reading the deloitte (2013) report, it was striking how supportive it is of theadvertising = Information school, as opposed to the advertising = Market Power school.While this editorial is not intended to provide a comprehensive view of the literature onthe economic effect of advertising over the past few decades, it is, however, striking to meas to how the overwhelming majority of recent studies appear to be more supportive ofthe 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 advertising’s role in economic growthand generally support positions of the advertising = Information school. also consistentwith the Information school’s 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 Kanetkaret 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 = MarketPower school, as observed by rotfeld and taylor (2009), numerous contemporary studieson 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 abouthow advertising works that are not substantiated. reading the deloitte report is a goodplace to start to get a good overview of what we do know about the general economiceffects of advertising.

Referencesalbion, M.s. & farris, P.W. (1980) the impact of advertising on the price of consumer

products. Journal of Marketing, 44(3), 17–35.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 ofPublic Policy and Marketing, 28(2), 146–161.

Chen, Q., He, Y., Zhao X. & griffith, d. (2008) sources of product information for Chineserural consumers. International Journal of Advertising, 27(1), 67–97.

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Cheong, Y., Kim, K. & Kim, H. (2013) advertising and promotion budgeting during volatileeconomic conditions: factors influencing the level of decentralisation in budgeting and itsrelations to budget size and allocation. International Journal of Advertising, 32(1), 143–162.

Comanor, W.s. & Wilson, t.a. (1974) advertising, market structure and performance. Reviewof Economics and Statistics, 49(4), 423–440.

deloitte (2013) Advertising Pay: How Advertising Fuels the UK Economy. london: theadvertising association.

graham, r.C. & frankenberger, K.d. (2011) the earnings effect of marketing communicationexpenditures during recessions. Journal of Advertising, 40(2), 5–24.

Kaldor, n. (1950) the economic aspects of advertising. Review of Economic Studies, 18(1), 1–27.Kanetkar, v., Weinberg, C.B. & Weiss, d.l. (1992) Price sensitivity and television advertising

exposures: some empirical findings. Marketing Science, 11(3), 359–371.Kaul, a. & Wittink, d.r. (1995) empirical generalizations about the impact of advertising on

price sensitivity and price. Marketing Science, 14(3), 151–160.Kopf, d.a., torres, I.M. & enomoto, C. (2011) advertising’s unintended consequences:

economic growth. Journal of Advertising, 40(4), 5–18.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 rippedfrom the headlines with (sometimes missed) opportunities for disciplined multi-disciplinaryresearch. Journal of Advertising, 38(4), 5–14.

taylor, C.r. (2012) Back to the future: some topics we should not forget about in advertisingresearch. International Journal of Advertising, 31(4), 699–702.

taylor, C.r., Zou, s. & ozsomer, a. (1996) advertising and its effect on industrialconcentration: a contingency perspective. Journal of Current Issues and Research inAdvertising, 18(1), 35–44.

telser, l. (1964) advertising and competition. Journal of Political Economy, 72(4), 537–562.Wilcox, g.B. & gangadharbatla, H. (2006) What’s changed? does beer advertising affect

consumption in the united states? International Journal of Advertising, 25(1), 35–50.Wilcox, g.B., Kamal, s. & gangadharbatla, H. (2009) soft drink advertising and consumption

in the united states 1984–2007. International Journal of Advertising, 28(2), 351–367.Wilcox, g.B., Kim, K.K. & schulz, H.M. (2012) liquor advertising and consumption in the

united states: 1971–2008. International Journal of Advertising, 31(4), 819–834.

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