Editorial: New Thoughts on Advertising’s Impact on Consumer Prices

Abstract

after years of following the academic literature on advertising, i continued to believe that the economic effects of advertising are one of the most understudied topics. in general, continued study of issues associated with society is needed, but it seems that in this context, economic issues are not studied as frequently as several other societal issues that are also important, and likely make for easier reading (see e.g., Kordrostami and laczniak 2022; Wulf, et al., 2022; Hartmann et al, 2022) for examples of strong work on current social issues). against this backdrop, i was pleased to see that the advertising association has published an update to laurence Green’s (2016) thoughtful white paper titled ‘does advertising increase Consumer Prices’, and i would like to use this space to encourage those who are interested to read it. as outlined by albion and Farris (1980), the debate over whether advertising expenditures in a product category lower or raise prices has often been addressed in the context of opposing views of advertising role in society. in short, the advertising = Market Power school argues that large advertising expenditures have several negative impacts on an industry, including higher barriers to entry and high concentration ratios, which facilitates collusion and enables the charging of higher prices (ornstein 1977). the advertising = information school suggests opposite effects, arguing that advertising increases consumer knowledge by providing information about product features, prices and quality, thereby reducing search costs and facilitating competition in a way that decreased industry concentration and leads to lower prices (Mcauliffe 1987). While it is beyond the scope of this editorial to discuss all prior research on the economic effects of advertising, my own prior review of academic literature suggests that the weight of the evidence, conducted mostly in the 1990s or before favors the notion that while the effect size may not be large, aggregate and expenditures in an industry place downward pressure on prices (taylor 2013). in spite of this, some studies or discussions continue to make opposite assumptions (rotfeld and taylor 2009). Green (2016) makes the same observation, stating, ‘the prosaic conclusion of “the man on the street” and of many commentators and even policymakers – that advertising puts prices up, if only to pay for the cost of the activity itself—is accepted without argument’. Green (2016) argues that the relationship between advertising and price is nuanced. on one hand, he notes, price should be viewed as something that advertising is able to influence and potentially bring more return on investment by reinforcing that a product is worth paying more for. on the other hand, Green observes that there are many other ways that advertising can lower prices, by promoting competition among brands or retailers, and by contributing to economies of scale and greater innovation. He also notes that advertising helps fund media consumption. the arguments for both the upward and downward pressures is more fully fleshed out in the 2006 white paper and is worth the read. https://doi.org/10.1080/02650487.2023.2183558