Is society wasting the resources it devotes to advertising? Or does advertising serve a valuable purpose? Assessing the social value of advertising is difficult and often generates heated argument among economists. Let's consider both sides of the debate.
The Critique of Advertising Critics of advertising argue that firms advertise in order to manipulate people's tastes. Much advertising is psychological rather than informational. Consider, for example, the typical television commercial for some brand of soft drink. The commercial most likely does not tell the viewer about the product's price or quality. Instead, it might show a group of happy people at a party on a beach on a beautiful sunny day. In their hands are cans of the soft drink. The goal of the commercial is to convey a subconscious (if not subtle) message: "You too can have many friends and be happy, if only you drink our product." Critics of advertising argue that such a commercial creates a desire that otherwise might not exist.
Critics also argue that advertising impedes competition. Advertising often tries to convince consumers that products are more different than they truly are. By increasing the perception of product differentiation and fostering brand loyalty, advertising makes buyers less concerned with price differences among similar goods. With a less elastic demand curve, each firm charges a larger markup over marginal cost.
The Defense of Advertising Defenders of advertising argue that firms use advertising to provide information to customers. Advertising conveys the prices of the goods being offered for sale, the existence of new products, and the locations of retail outlets. This information allows customers to make better choices about what to buy and, thus, enhances the ability of markets to allocate resources efficiently.
Defenders also argue that advertising fosters competition. Because advertising allows customers to be more fully informed about all the firms in the market, customers can more easily take advantage of price differences. Thus, each firm has less market power. In addition, advertising allows new firms to enter more easily, because it gives entrants a means to attract customers from existing firms.
Over time, policymakers have come to accept the view that advertising can make markets more competitive. One important example is the regulation of certain professions, such as lawyers, doctors, and pharmacists. In the past, these groups succeeded in getting state governments to prohibit advertising in their fields on the grounds that advertising was "unprofessional." In recent years, however, the courts have concluded that the primary effect of these restrictions on advertising was to curtail competition. They have, therefore, overturned many of the laws that prohibit advertising by members of these professions.
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