Ap Economics - Advertising

Sean Clinton

Mr. Colistra

AP Economics

Advertising

Economists have debated on whether or not advertising has a positive or negative effect on prices, competition, and efficiency. There has also been a debate on the effectiveness advertising has on economies of scale. Historically, many economists have argued that the brand loyalty generated by advertising can lead to the creation of entry or ‘mobility’ barriers for new or smaller competitors.’ This anti-competitive view rests largely on the belief that economies of scale in advertising create substantial advantages for large firms which advertise intensely. The anti-competitive view is not universally shared, however, as several economists have argued that advertising can enhance competition by increasing the information set available to consumers. Several economists have shown that there is little, if any, relation between advertising and profit rates (a common substitution for monopoly rents) when the investment aspects of advertising are accounted for.

The positive effects of advertising are as follows. In order to make rational, efficient decisions, consumers need information about product characteristics and prices. Media advertising may be a lost-cost means for consumers to get information. Advertising provides information about available options and reduces direct and indirect costs. By providing information about the various competing goods that are available, advertising diminishes monopoly power. By enhancing competition, advertising results in greater economic efficiency. By facilitating the introduction of new products, advertising speeds up technological progress. By increasing sales and output, advertising can reduce long-run average total cost by enabling firms to obtain economies of scale.  American companies spent nearly $300 billion on advertising across all industries and media last year, says a study commissioned by a coalition of the nation's big advertisers, the advertising industry and media organizations.

The Advertising Coalition and the Association of National Advertisers urged that the American companies spent nearly $300 billion on advertising across all industries and media last year, says a study commissioned by a coalition of the nation's big advertisers, the advertising industry and media organizations. The Advertising Coalition and the Association of National Advertisers urged that the study, by IHS Economics and Country Risk, be used as a weapon to fight congressional efforts to restrict the tax deductibility of advertising expenses. On a national level, the study said companies in the United States spent an estimated $297 billion on advertising in 2014. It also said advertising supported $5.8 trillion of U.S. economic output and 20% of the 142 million jobs in the United States. The average salary for the jobs that are supported by advertising is nearly $96,000, or about 20% above the national salary average, the report said. The study also forecast that, under current economic conditions, spending on advertising will grow at an average rate of 3.3% from 2014 through 2019, rising to $349 billion at the end of this decade. (Author: Ana Radelat) Through this case study, one can see the positive effect advertising has on profit.

The negative effects of advertising are as follows. Much advertising is designed simply to manipulate or persuade consumers, that is, to alter their preferences in favor of the advertiser’s product. An example is if a famous Athlete advertises a particular soft drink and because he/she drinks the beverage, you should too. This conveys little or no information to consumers about price or quality. Also, advertising is sometimes based on misleading and extravagant claims that confuse consumers rather than enlighten them. Advertising can lead to brand loyalty which, in turn, can lead to a company achieving monopoly power via their advertising. In time, consumers may lose the advantages of competitive markets and face the disadvantage of monopolized markets. Advertising can also be self-canceling. The advertising campaign of one fast-food hamburger chain may be offset by equally costly campaigns waged by rivals, so each firm’s demand actually remains unchanged. Advertising leads to economic inefficiencies such as increased monopoly power and are self-canceling.