Issues in Advertising: The Economics of Persuasion

By David G. Tuerck | Go to book overview

ADVERTISING INTENSITY AND
INDUSTRIAL CONCENTRATION-
AN EMPIRICAL INQUIRY,
1947-1967

Stanley I. Ornstein and Steven Lustgarten

A basic tenet of traditional industrial organization textbooks holds that large scale advertising expenditures lead to monopoly power.1 Advertising is believed to reduce price elasticity of demand and allow price to be raised above the competitive level. Resulting excess profits are said to persist because of advertising created barriers to entry due to (1) product differentiation or brand loyalty created by advertising and (2) economies of scale in advertising. In addition, supporters of this theory generally conclude that much advertising is misleading and wasteful and that consumers would benefit from restrictions on advertising.2

In contrast to this traditional view, recent literature argues that advertising increases competition3 by providing information to consumers on product quality and characteristics and by allowing new entrants to overcome existing brand loyalties. Advertising helps the more efficient firms expand their market share, thereby resulting in an improved allocation of resources. According to this view, restrictions on advertising are harmful to consumers.

The behavior of the Federal Trade Commission in recent years illustrates these contradictory views on advertising. The FTC has examined restrictions on advertising by physicians, pharmacists, and optometrists

____________________
We are indebted to Edwin W. Eckard, Jr. for computer assistance.
1
See Joe S. Bain, Industrial Organization, 2nd ed. ( New York: John Wiley and Sons, 1968), chapter 7, and Frederick M. Scherer, Industrial Market Structure and Economic Performance ( Chicago: Rand McNally, 1970), chapter 14.
2
Scherer, Industrial Market Structure, p. 344.
3
Yale Brozen, "Advertising, Concentration and Profitability" in Goldschmid and Weston, eds., Industrial Concentration: the New Learning ( Boston: Little, Brown and Company, 1974), pp. 115-137; Phillip Nelson, "Advertising as Information," Journal of Political Economy, vol. 81 ( July/August 1974), pp. 729-754; Phillip Nelson , "Economic Consequences of Advertising," Journal of Business, vol. 48 ( April 1975), pp. 213-241.

-217-

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Issues in Advertising: The Economics of Persuasion
Table of contents

Table of contents

  • Title Page iii
  • Major Contributors v
  • Contents ix
  • Introduction 1
  • Acknowledgments 11
  • Part One Issues in Regulation 13
  • Advertising and Legal Theory 15
  • Advertising Regulation and the Consumer Movement 27
  • Commentaries 45
  • Part Two Advertising and the Firm 69
  • Towards a Theory of the Economics of Advertising 71
  • Introduction 71
  • Optimal Advertising: An Intra-Industry Approach 91
  • Conclusion 111
  • Technical Appendix 112
  • Commentaries 115
  • Part Three Advertising as Information 131
  • Advertising as Information Once More 133
  • Appendix A: Derivation of the Relationship Between a and P 156
  • Appendix B: Data Sources 158
  • Advertising, Information, and Product Differentiation 184
  • Commentaries 193
  • Four Part Advertising, Concentration, and Profits 215
  • Advertising Intensity and Industrial Concentration- an Empirical Inquiry, 1947-1967 217
  • Conclusions 249
  • Advertising and Oligopoly: Correlations in Search of Understanding 253
  • Appendix A 262
  • Appendix B 263
  • Commentaries 267
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