Why do firms advertise? Should the government ban or restrict advertising?

Firms use a wide range of advertising as a tool to ultimately increase their profits in the short, medium or long run, by either being able to sell more products or to sell products at a higher price. The aim is to shift the demand curve in a beneficial way (Figure 1).

The way a firm advertises is based on many factors; the product, the company and the market segment to name but a few. It also depends on the mediums available to them, such as newspapers, radio, television, cinema, posters, or even the logo on t-shirts.

The frame of advertisement is information. To get a message to the customer, may that be the features of a product, the

price of it, the location of where to get it, or simply that it is cool to have it. This mostly depends on the product. While Levi s found it very beneficial in the late 80 s and early 90 s to advertise their product as being cool and in , Volvo found their main selling point in the safety of their cars. Neither company would have been likely to increase profits had they reversed their strategies.

What Levi s was doing, in fact, was creating a brand. No actual information was given about the product, but an image was build around it, that the customer buying a jeans wanted to portrait when he wore it. This way of marketing is also known as persuasive advertising. This is often not based around an actual product rather than the entire company.

Not so for Volvo. Their way of advertising was (then, not so much now) mainly about pointing out specific features and the general characteristics. This is also known as informative advertising. However, most companies use both, persuasive and informative advertising for their products.

Another strategy is to try to create a strategic entry barrier. This means that by advertising a product in a certain way, it is made difficult or impossible for new producers to enter the market. While this can be very effective, it is not always legal to do so. This kind of advertisement is often neither, persuasive nor informative.

Exactly the opposite, collaborative advertisement, has become increasingly popular in the last two decades. The two main types are same-function alliances and cross-function alliances. Types of the former usually occur in perfectly competitive industries such as wheat-, egg- or milk-production, which consist of a large number of producers with (nearly) identical products. Cross-functional collaborative advertisement usually occurs when two or three firms in similar markets, which are at no competition to each other, advertise together, as for example a manufacturer of washing machines and washing powder.

Before a firm can efficiently advertise its products however, it is important to research the market beforehand. A lot of details, some obvious, others less so, are needed to assess what kind of advertisement could be used. An obvious example would be the market structure, a less obvious one to consider could be Batsell and Polking s model (1985), which looks at relevant and irrelevant competing products.

It is not always necessary or beneficial for firms to advertise. While in a pure monopoly, it is not necessary, in a duopoly it can reduce profits. This is because if two competing firms advertise about as much as each other, which would normally be the case, then the general demand for the product does not increase and they sell as much products as they would without any advertising at all, but they decrease

Advertising in duopoly

profits by paying for the advertising( Figure 2). This is known as Prisoner s dilemma It would be to everyone s advantage if, in such a case, both parties involved came to an agreement not to advertise, which however very rarely happens. Without such an agreement, regardless of what the other firm does, it pays to advertise.

In recent years, advertisement has suffered from increased resentment among the public. Consumers feel increasingly over-saturated by the amount of adverts they see every day. They feel they have to pay more, as they have to pay for the advertising costs for a product, and they feel they get pressurised and persuaded into buying products that they don t really need or want. Also there are certain advertising campaigns that are offensive (Beneton) or that reach the wrong market segments (Cigarettes).

However, in reality, advertisement often decreases prices due to economies of scale. The more output is produced the cheaper the individual product. Also, advertisement carries an informative role, and, while biased, still is a very effective way for consumers to compare different products, as well as inform the public about new products. Advertising also increases competition, which is usually to the benefit of the consumer, as it usually involves better products and/or lower prices.

Advertising also secures hundreds of millions of jobs world-wide. Athletes would not be able to compete at a level they do today was it not to sponsoring, to give just one example of many.

There are a number of reasons why it would be impossible for any government in the world to ban advertisement. Firstly, it would be an infringement of free speech, and therefore to one s human rights. Secondly, it would be impossible to draw a line, since even a sign saying Supermarket on the door or a person shouting Cheap apples during a market constitutes advertising. There would also be no reason to ban advertisement since it is beneficial to both the consumer and the company.

However, there is a need of restricting advertising. The most obvious example is tobacco products. Children and teenager are far more open to manipulation than adults, and since cigarettes are known and proven to be bad for one s health as well as addictive, especially in children and teenagers, the government has a moral obligation to try to minimise the amount of adverts that they get confronted with. This is why cigarette adverts were banned from TV and radio stations in the 80s. However, I do not agree that enough has been done in this respect. In my eyes a total ban of advertising for tobacco products could be justified. Similar guidelines for alcoholic products should be enforced too, to decrease the number of under-age drinking.

Also, regulations should be enforced about fair trade, as for example with strategic entry barriers mentioned above, or unjustly degrading other companies products in advertisement.

Another very important area where regulation is needed is where individuals feel offended, hurt or disturbed by adverts. This is why in the USA, it is now illegal to advertise with famous people who have died after a Georgia Supreme Court ruling barring a company from using Martin Luther King Jr. in an advert.

Finally, regulation is vital about deceptive advertising. This occurs when companies make incorrect or misleading claims about their products. It can be very hard to draw a clear line between persuasive and deceptive advertisement, but this is necessary to protect consumers and to establish a certain good faith and trust in advertisement.

Bibliography

Stiglitz and Driffill Economics(2000)

Begg, Dornbusch and Fischer Economics (5th .ed)(1997)

E Davies Is advertising rational? Business strategy review (1991)

M Moschandreas Business Economics(1994)

Published Papers:

- The impact of advertising in a duopoly model

L Schoonbeek and P Kooreman Dep. of Econ., Univ. of Groningen

- Price competition, advertising and media market concentration

J H ckner and S Nyberg Dep. of Econ.., Univ. of Stockholm

- 1989 American acadamy of advertising (AAA) Proceedings

- Direct estimation of Batsell and Polking s model

Sang-June Park and Minhi Hahn, Korea adv. Inst. of Sci. and Tech.

Articles:

- Managing advertising and promotion for long-term profitability-Marketing Sc.

- Collaborating to compete Marketing Science

- To zap or not to zap: a study of the determinants of channel switching during

commercials Marketing Science

- Influence of media marketing The Economist

- Crazy Horse Beer brews a legal storm Michael Gartner