-
Advertising is a method used by producers
to communicate information to consumers
about
the
goods
and
services
they
have
to
sell.
In
today
’
s
society,
advertising
is
pervasive
and
impossible
to
escape.
It
exists
in
people
’
s
daily
lives;
it
influences
people
in
many
different
ways.
Radio
and
television
provide
entertainment
but
are
laden with
advertisement.
Newspaper and
magazines have more advertisement
than
copy. In the subway, along the freeway,
at the train station, a variety of advertisement
can
also
be
seen.
Every
year
a
huge
amount
of
money
is
spent
on
advertising.
For
example,
in
2002
over
$$
236
billion
was
spent
on
advertising
in
the
united
states,
which is over twice
as much as federal, state, and local governments
spent on all cash
assistance programs
for the poor in 2002. (Waldman & Jensen, 2007) So
some people
think advertising is a
waste of society
’
s
resources. But some opponents disagree. This
essay will use relative theory and
evidence to discuss this statement. In the first
part of
the essay, the reasons why
advertising is a waste of
society
’
s resources are
outlined.
The
first reason is that advertising increases the
product price. This is one of the most
famous critiques of advertising, which
was put forward by Kaldor (1950), he argue a
that there is an oversupply of
advertising, and a waste of resources because
consumers
pay a higher price for the
advertised goods than before. Advertising is
provided jointly
with goods and
services, and consumers have to pay for
advertising they do not want.
Advertising
is
supplied
as
a
‘
free
’
service
not
only
to
purchasers,
but
also
to
consumers who will never buy the good
or service under consideration, so the amount
of advertising which is supplied
exceeds that which is demanded. Because
advertisers
do not charge a price for
advertising, it will result in less adverting
being demanded
than is required by
consumers.
The
second
reason
is
that
advertising
interferes
with
the
consumers
’
preference.
Traditionally,
consumers
could
do
decisions
independently
with
best
efficiency.
However,
some
persuasive
advertising,
in
contrast
with
informative
advertising,
distorts
the
information
consumers
receive,
making
it
more
difficult
for
people
to
make informed choices on the basis of
objective information. It alters choices away
from the efficient lines that
‘
consumer
sovereignty
’
would yield.
(Shepherd, 1997, P
111)
To
make
more
profits,
advertisers
even
persuade
consumers
to
buy
some
unnecessary things or
even harmful products, the typical examples are
the luxury and
cigarette. Some
advertisers say comestics could make one look
younger than 10 years
old and cigarette
could make one more sexy. Because of advertising
tends to mislead
or distort the
consumers
’
preference,
advertising creates a waste of
society
’
s resources
because of the damage of consumer
welfare.
The
third
reason
is
advertising
create
the
barrier
to
new
entrants,
which
decrease
competition of free market. To the new
entrants, there are three main barriers. One is
advertising
increase
the
start-up
price.
Weiss
(1963)
said
new
firms
need
to
spend
huge
money
on
advertisement
to
establish
name
reputation
and
a
presence
in
the
market.
Another
is
the
economics
of
scale
in
advertising.
This
is
because
new
small-scale
advertisers
should
pay
more
per
unit
of
advertising
than
large-scale
advertisers and
firms should advertise a large number of time to
let consumers know
the
products.
(Schere
&
Ross,1990)
The
third
is
advertising
create
loyalty
effects,
which lead to the difficult for the new
firms to enter.
Anyway, in this
situation, the
more
effective
resources
could
not
enter
into
the
market,
furthermore,
the
low
effective
production
factors
escape
from
washing
out.
As
a
result,
to
the
society,
limited resources in the market could
not be assigned effectively in the market. From
this view, the advertising is a waste
of society
’
s resources.
Although there are some
comments
that
advertising
is
a
waste
of
society
’
s
resources,
many
people
hold
the
opposite view.
The first view is that advertising
could differentiate products. Although advertising
is
a barrier to entry that prevent
competitors from challenging the market position
of a
large
firm,
and
advertising
needs
firm
’
s
large
advertising
expenditure.
However,
heavy
advertising
could
differentiates
the
firm
’
s
products,
whether
or
not
there
are
real differences between
it and it
’
s
competitions
’
. For example,
the advertisement of a
milk brand could
make the differences with other milk brand. The
advertising-to-sales
ratio
provide
an
indication
of
the
degree
of
differentiation.
(Bernadette
&
David,
2005,P249) Dorfman-Steiner(1954)
got
the formula of
advertising-to-ratio for profit
maximisation,
which
is
P
A
A
/PQ=[(P-MC)/P]*E
A .
As
(P-MC)/P
is
the
Lerner
index,
which is a measure of market power. It
is known that market power is decided by the
product
differentiation. So
the bigger the ratio of advertising, the higher
the market
power is,
which
means the higher degree of differentiation.
In
addition,
in
the long
run,
advertising
could
increase
the
brand
loyalty.
Product
differentiation
and
brand
loyalty
is beneficial to producers, so considering from
this view, advertising is not a
waste
of society
’
s resources.
The
second
view
is
that
advertising
reduce
search
cost
of
consumers.
In
perfect
competitive
market,
all
buyers
and
sellers
have
perfect
knowledge,
so
the
price
is
same.
However,
in
the
real
market,
consumers
do
not
have
perfect
knowledge
and
price is not same. So
consumers will be willing to spend on the search
for lowest price.
The more a consumer
intends to spend on the product, the more he will
be willing to
spend on the search for
the lowest price. Stigler in 1961 concluded that
advertising of
prices by competitors
provides the information necessary for consumers
to decide on
which outlet to choose.(
Stigler,1961) So advertising reduces search cost.
The
third
view
is
that
advertising
improves
the
efficiency
and
speed
with
which
consumer
search
for
information.
The
reason
is
explained
using
the
following
diagram.
The
horizontal
line
is
the
marginal
cost
line,
which
represents
the
cost
of
each
additional
hour
of
search.
The
downward
line
is
the
marginal
benefit
line,
which
represent
the
benefit
to
the
consumer
from
each
additional
hour
of
search.
As
the
increase
of search time,
the benefit
gained from
spending
additional
time searching
decreases. The search will stop at
S
1
where marginal benefit
equals the marginal cost.
Because
of
the
provision
of
information
through
advertising,
the
marginal
benefit
gained
from
each
additional
hour
of
information
search
declines,
which
shifts
the
marginal
benefit
line
to
left.
So
the
optimal
search
time
decreases
from
S
1
to
S
2.
Therefore,
information
is
disseminated
more
efficiently
by
advertising
than
it
is
searched by a large of consumers
independently. ( Lipczyski,Wilson &Goddard,2009)
Diagram 1
Marginal benefit,marginal cost
S
2
MC
MB
2
MB
1
S
1
Search time
Source from
(John Lipczyski., John . & John Goddard. (2009)
Industry
Organiztion:Competi
tion,Strategy,Policy.
P 439
.3
rd
edition. Prentice
Hall.)
People hold
different views about advertising. Some people
believe advertising is a
waste of
society resources, while others take the opposite
side. As far as I concerned,
the latter
notion holds more weight.
In the first part, 3 criticisms are
mentioned. The first criticism is bought forward
by
kaldor
that
advertising
increase
price
of
product,
which
leads
to
waste
of
society
’
s
resource.
However,
through
the
study
of
the
relationship
between
advertising
and
price, kaul and Wittink (1995) prove
that not all advertising will increase the product
price. It depends on if the advertising
contain price information. If advertising contain
price information, it will leads to
intensified competition and results in lower
prices.
For
example,
Benham
(1972)
shows
the
price
of
eyeglass
market
was
substantially