Lee Benham, Jul 28, 2013
The impact of advertising on prices has long been a matter of dispute. It has been argued that the persuasive aspects and the product differentiation effects of advertising tend to raise the prices of products to consumers. On the other hand, by providing consumers with information about products and alternatives in the market, allowing them to economize on search and to locate low-priced sellers more readily, advertising may tend to lower prices to consumers. It may also lower prices by allowing sellers or producers to economize on other merchandising costs and to take advantage of economies of scale. On purely theoretical grounds, therefore, no reliable prediction can be made as to the overall effect of advertising on prices.
While there has been much discussion of this question, relatively little has been done to estimate empirically the relationship between advertising and prices. Some studies have compared prices for different brands of “homogeneous” items, some of which were advertised and some of which were not. In general, the advertised brands were found to sell at higher prices. While such comparisons have frequently neglected such characteristics as quality control, service provided with the sale, location of sales outlets, waiting time to purchase, and inventory and range of stock available, it is not my purpose here to further refine measures of homogeneous commodities. It is rather to propose an alternative approach to this question.
