An economic theory underlying alcohol advertising and alcohol consumption provides some important insights into how econometric studies of alcohol advertising should be conducted and why certain econometric approaches produce results apparently at odds with other approaches. This theory posits that phenomena known as advertising response functions can describe the relationship between alcohol advertising and alcohol consumption. Advertising response functions have been used as the basis for research on brands of various products-from soda to saltines-to illustrate the effect that different levels of advertising have on product consumption.l
The advertising response function, which is a way of quantifying the relationship between advertising and consumption, is based on the theory of diminishing marginal product (see figure). Research shows that advertising "works" (i.e., consumption rises as advertising increases), but the economic theory of diminishing marginal product suggests that the relationship will level off at some point. According to the theory of diminishing marginal product, the continued addition of advertising messages eventually will lead to smaller and smaller increments of consumption. For example, suppose that adding 1,000 advertising messages per week to an existing advertising program of 5,000 messages per week will increase sales by 100 units per week. The theory of diminishing marginal product predicts that adding more advertising messages will not continue to boost sales by the same rate: The same 1,000 messages per week added to an advertising program of 50,000 messages per week may increase sales only by, say, 10 units per week.
Empirical work on advertisements of specific brands of beer (i.e., brandlevel research) clearly supports the diminishing marginal product assumption (Rao and Miller 1975; Ackoff and Emshoff 1975). In the same way, the economic theory that describes the brand-level advertising response function can apply to a product-level response functionin this case, the product is defined as all alcoholic beverages. (The product-level response function does differ from the brand-level response function in one important way, however: Advertising-induced sales come at the expense of sales of nonalcoholic products instead of simply another brand of alcoholic beverage.) To temper increases in consumption resulting from alcohol advertising, some countries and localities have adopted various forms of alcohol advertising bans. Generally, when alcohol advertising is banned from certain media, consumption still rises as advertising increases, but to a lesser extent than it would without the ban. The degree of reduction depends on the extent of the ban and the industry's reaction to it. Although an advertising ban eliminates the use of specific media, it does not eliminate advertising.
The response to a ban can be seen as a three-step process. First, the alcohol advertisers will shift their existing advertising budget into the nonbanned media. Second, each of the nonbanned media are also subject to diminishing marginal product. …