The Economic Consequences of Advertising

Why does advertising increase the sales of a brand that advertises? Two answers to that question have been provided by the literature. There are those who feel that advertising operates predominantly by changing consumer tastes.' Others focus on advertising's information function.2 The idea that advertising changes tastes seems to have a peculiar appeal to advertising's critics. But this idea is consistent with advertising operating in perfectly competitive markets3 and with advertising improving welfare.' I find the hypothesis that advertising changes tastes intellectually unsatisfactory. We economists have no theory of taste changes, so this approach leads to no behavioral predictions. The intuitions of one group of economists are matched against the intuitions of other economists with no clear resolution. In marked contrast, the hypothesis that advertising increases sales by increasing information has a wide range of testable implications. One can, therefore, determine whether it is a valid theory of advertising or not. The data support this proposition. However, advertising's critics are not satisfied. They are willing to concede that there is much, indeed, in advertising that is informational: price advertisements, help-wanted advertisements, and pictures of dresses and furniture available in stores. (Having made this concession, they then ignore it in their subsequent remarks.) But surely, they maintain, this is not the whole story. What about the frequent endorsements of a brand by announcers, actors, or celebrities-all of whom are paid for their efforts? It is advertisements of this character that have produced much of the skepticism about advertising's information role. It is such advertisements that have generated the popular belief in advertising's magical ability to change tastes. In my 1974 paper (see n. 3 above) I show that there is an important informational function even with such advertisements. Since this analysis strikes at the basis of popular objections to advertising, a brief summary