Researchers study the effects of tobacco and alcohol advertising because the consumption of these substances is known to have potentially adverse health consequences. Tobacco use results in illness in proportion to its consumption, with about one-third of tobacco consumers dying as a result of these illnesses. Alcohol is different in that about nine out of 10 adults use alcohol in limited amounts with no adverse outcomes. The other one in ten abuses alcohol, which results in a range of negative health and social outcomes including an estimated 100,000 premature deaths per year.
There have been a number of empirical studies on the effects of tobacco and alcohol advertising. The bulk of these studies indicate that advertising does not increase tobacco and alcohol consumption. However, many public health advocacy organizations do not accept these results. An examination of the methods and data commonly used in empirical studies provides an explanation for these divergent opinions. The key to understanding the empirical problems lies in the advertising response function and the type of data used to measure advertising.
The advertising response function explains the relationship between consumption and advertising. A brand-level advertising response function shows that the consumption of a specific brand increases at a decreasing rate as advertising of that brand increases. That is, the response function illustrates a diminishing marginal product of advertising. (1) Ultimately, consumption is completely unresponsive to additional advertising. The assumptions of the brand-level advertising response function also can be applied to industry-level advertising. The industry level includes all brands and products produced in an industry; for example, the industry level for alcohol would include all brands and variations of beer, wine, and spirits. The industry-level advertising response function is assumed to be subject to diminishing marginal product, as in the case of the brand-level function. The industry-level response function is different from the brand-level response function, though, in that advertising-induced sales must come at the expense of sales of products from other industries. Increases in consumption come from new consumers, often youths, or from increases by existing consumers.
The industry-level response function can be defined by measuring advertising with a time-series of national data. This function also can be defined by measuring advertising with cross-sectional data from local markets. The industry-level advertising response functions provide two simple predictions: first, if advertising is measured at a high enough level, there will be little or no consumption response; second, the greater the variance in the advertising data, the greater the probability of measuring the effect of advertising in the upward sloping section of the response function.
Most prior studies of tobacco and alcohol advertising use annual or quarterly national aggregate advertising expenditures as the measure of advertising, probably because this type of data was, at one time, the least expensive available. These time-series studies generally find that advertising has no effect. The oligopolistic nature of the tobacco and alcohol industries results in competition for market share with advertising (and other marketing) rather than with price. Indeed, price competition may set off a price war in which all firms will lose revenue. Alternatively, the "share of voice"--that is, the percent of industry-level advertising undertaken by one firm--is directly proportional to the share of market. The advertising to sales ratios for tobacco and alcohol companies are about 6 to 9 percent while the average American firm has an advertising to sales ratio closer to 3 percent. Aggregate national advertising may well be in the range of near-zero marginal product. The advertising response function predicts that …