Issues in Advertising: The Economics of Persuasion

Michael E. Porter

Discussion of advertising's roles--as informer, persuader, facilitator of competition, deterrent to competition, villain or savior to the media-- and influence on social values has filled many volumes. In fact, a recent review of the literature on just a few of these roles fills a whole book.¹

Despite this attention to the effects of advertising, we have very little in the way of an operational theory of the optimal level of advertising by the firm. Dorfman and Steiner's 1954 paper presented a model of the determination of optimal advertising in a simple world where a monopolist faced a demand curve dependent on price and advertising outlays.² While this model is logically correct, it is nonoperational since the parameters that underlie the advertising elasticity of demand are unknown. Neither do we know the shape of the advertising cost function. Further, Dorfman and Steiner's model cannot easily be extended to cover advertising competition among firms, which should affect the revenue productivity of individual firm advertising outlays.

Other approaches to the optimal level of advertising of the firm have sought to relate it to various aspects of the firm's environment. A body of literature has developed on the relation between advertising and seller concentration, represented by papers in this conference.³ This literature reflects the view that advertising levels will be affected by the patterns of competition among firms as determined by concentration. Other analyses have proposed that firms' advertising levels are affected by the varying cost of supplying information to differently situated

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