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ones. Viewed this way, consumer demand generates new products and the advertising that accompanies them,
not the other way around.
In a similar vein "non-informative," or image, advertising (the Marlboro man, for example) can be usefully
thought of as something that customers demand along with the product. When some customers are unwilling to
pay for image, producers that choose not to advertise can supply them with a cheaper product. Often the same
manufacturer will respond to these differences in customer demands by producing both a high-priced, labeled,
heavily advertised version of a product and a second, low-priced line as an unadvertised house brand or generic
product.
Advertising messages obviously can be used to mislead, but a heavily advertised brand name also limits the
scope for deception and poor quality. A firm with a well-known brand suffers serious damage to an image that
it has paid dearly to establish when a defective product reaches the consumer. Interestingly, officials in the So-
viet Union encouraged the use of brand names and trademarks even under central planning as a way of monitor-
ing which factories produced defective merchandise and as a way of allowing consumers to inform themselves
about products available from various sources.
Economic debate in the fifties focused on whether advertising promotes monopoly by creating a "barrier to
entry". Heavy advertising of existing brands, many economists thought, might make consumers less likely to
try new brands, thus raising the cost of entry for newcomers. Other economists speculated that advertising made
consumers less sensitive to price, allowing firms that advertise to raise their prices above competitive levels.
The purported link between advertising and monopoly became so widely accepted that in the sixties the U.S.
attorney general proposed a tax on advertising.
Economic researchers addressed this issue by examining whether industries marked by heavy advertising
were also more concentrated or had higher profits. The correlation between advertising intensity and industry
concentration turned out to be very low and erratic from sample to sample, and it is largely ignored today.
What's more, early research found that high levels of advertising in an industry were associated with unstable
market shares, consistent with the idea that advertising promoted competition rather than monopoly.
The idea that advertising creates monopoly received support from studies that found high rates of return in
industries with high levels of advertising. As other economists pointed out, however, the accounting rates of
return used to measure profits do not treat advertising as an asset. Consequently, measured rates of return-
income divided by measured assets-will often overstate profit rates for firms and industries with heavy advertis-
ing. Subsequent work showed that when attention is restricted to industries with relatively small bias in the ac-
counting numbers, the correlation disappears. A lucky by-product of the advertising-and-profits dispute were
studies that estimated depreciation rates of advertising – the rates at which advertising loses its effect. Typi-
cally, estimated rates are about 33 per cent per year, though some authors find rates as low as 5 per cent.
Contrary to the monopoly explanation (and to the assertion that advertising is a wasteful expense), advertis-
ing often lowers prices. In a classic study of advertising restrictions on optometrists, Lee Benham found that
prices of eyeglasses were twenty dollars higher (in 1963 dollars) in states banning advertising than in those that
did not. Bans on price advertising but not on other kinds of advertising resulted in prices nearly as low as in the
states without any restrictions at all. Benham argued that advertising allowed high-volume, low-cost retailers to
communicate effectively with potential customers even if they could not mention price explicitly.
The importance of price advertising, however, apparently varies with the way the consumers typically ob-
tain price information and make purchase decisions. An unpublished study by Al Ehrbar found that gasoline
prices are significantly higher (about 6 percent, net of excise taxes) in communities that prohibit large price
signs in gas stations.
In the past many professions such as doctors, lawyers, and pharmacists succeeded in getting state legisla-
tures to implement complete or partial bans on advertising, preventing either all advertising or advertising of
prices. Recent court decisions have overturned these restrictions. At the federal level the U.S. Federal Trade
Commission has jurisdiction over advertising by virtue of its ability to regulate "deceptive" acts or practices. It
can issue cease-and-desist orders, require corrective advertising, and mandate disclosure of certain information
in ads.
The regulation of cigarette advertising has been particularly controversial. The Federal Trade Commission
has required cigarette manufacturers to disclose tar and nicotine content since 1970, although it had curiously
prohibited precisely the same disclosure before that. The federal government also banned all radio and televi-
sion advertising of cigarettes beginning January 1, 1971. While overall cigarette advertising expenditures
dropped by more than 20 per cent, per capita cigarette consumption remained unchanged for many years. Crit-
ics of the regulations maintain that it was the growing evidence of the harmful effects of smoking, rather than
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