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Advertising
By E. Roy Weintraub
Economic analysis of advertising dates to the thirties and forties, when critics attacked it as a monopolistic
and wasteful practice. Defenders soon emerged who argued that advertising promotes competition and lowers
the cost of providing information to consumers and distributing goods. Today, most economists side with the
defenders most of the time.
There are many different types of advertising – the grocery ads that feature weekly specials, "feel-good"
advertising that merely displays a corporate logo, ads with detailed technical information, and those that prom-
ise "the best". Critics and defenders have often adopted extreme positions, attacking or defending any and all
advertising. But at the very least, it seems safe to say that the information that firms convey in advertising is not
systematically worse than the information volunteered in political campaigns or when we sell a used car to a
stranger.
Modern economics views advertising as a type of promotion in the same vein as direct selling by salesper-
sons and promotional price discounts. This is because it is easier to understand why advertising is used in some
circumstances and not in others by looking at the problems firms face in promoting their wares, rather than by
focusing on advertising as an isolated phenomenon.
While advertising has its roots in the advance of literacy and the advent of inexpensive mass newspapers in
the nineteenth century, modern advertising as we know it began at the turn of the century with two new prod-
ucts, Kellogg cereals and Camel cigarettes. What is generally credited as the first product endorsement also
stems from this period: Honus Wagner's autograph was imprinted on the Louisville Slugger in 1905.
Advertising as a percentage of GNP has stayed relatively constant since the twenties at roughly 2 per cent.
More than half of that total is national, as opposed to local, advertising. In the eighties newspapers accounted
for
26 per cent of total advertising expenditures, magazines for 23 per cent, television for 22 per cent, radio for 7
per cent, and miscellaneous techniques such as direct mail, billboards, and the Goodyear blimp for the remain-
ing
22 per cent. One popular argument in favor of advertising is, in fact, that it provides financial support for news-
papers, radio, and television. In reply critics remark that advertiser-supported radio and television programming
is of low quality because it appeals to those who are easily influenced by advertising. They also charge that ad-
vertiser-supported newspapers and magazines are too reluctant to criticize products of firms that are actual or
potential advertisers.
While aggregate expenditures on advertising have remained steady as a percentage of GNP, the intensity of
spending varies greatly across firms and industries. Many inexpensive consumer items such as over-the-counter
drugs, cosmetics, and razor blades are heavily advertised. Advertising-to-sales ratios also are high for food
products such as soft drinks, breakfast cereals, and beer. And there is remarkable stability in this pattern from
country to country. If a type of product is heavily advertised in the United States, it tends to be heavily adver-
tised in Europe as well. Even within an industry, however, some firms will advertise more, others less. Among
pharmaceutical manufacturers, Warner-Lambert's spending on advertising is over 30 percent of sales, while
Pfizer's advertising-to-sales ratio is less than 7 percent.
The differences among industries, while stable, are deceptive. For example, automakers typically spend
only 1 to 2 per cent of sales on advertising, but their products are heavily promoted by the sales staffs in dealer
showrooms. Similarly, industrial products are not heavily advertised because trade fairs and point-of-sale pro-
motion are often more cost-effective than advertising. Products with relatively few customers may not be adver-
tised at all, or advertised solely in specialized publications.
While persuasion and the creation of brand loyalty are often emphasized in discussions of advertising,
economists tend to emphasize other, perhaps more important, functions. The rise of the self-service store, for
example, was aided by consumer knowledge of branded goods. Before the advent of advertising, customers re-
lied on knowledgeable shopkeepers in selecting products, which often were unbranded. Today, consumer fa-
miliarity with branded products is one factor that makes it possible for far fewer retail employees to serve the
same number of customers.
Newly introduced products are typically advertised more heavily than established ones, as are products
whose customers are constantly changing. For example, cosmetics, mouthwash, and toothpaste are marked by
high rates of new product introductions because customers are willing to abandon existing products and try new
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