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Advertising, Choice and Welfare

  • Jeffrey James

Abstract

There can be little doubt that the main purpose of advertising is to shift the demand curve faced by the individual firm to the right and to make it less elastic. If successful in achieving this objective advertising gives rise to a direct welfare effect on consumers. It is apparent from a number of empirical studies that, although the size of the shift in the demand curve may vary from one case to another, it cannot in general be dismissed as negligible. Advertising does indeed, therefore, pose a problem in welfare economics. As one recent study of the United Kingdom has put it:

We did find evidence that advertising affects consumer choice at all levels. Of course, this tells us nothing about whether consumers’ choices are in some sense ‘better’ after advertising has taken place than before it. We merely conclude that it is not a question which can be easily escaped in a welfare analysis of advertising at any level of aggregation on the grounds of negligible advertising effects.1

Keywords

Demand Curve Welfare Loss Consumer Choice Cognitive Dissonance Efficiency Frontier 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes and References

  1. 1.
    K. Cowling, J. Cable, M. Kelly and T. McGuinness, Advertising and Economic Behaviour (Macmillan, 1975 ) p. 197.Google Scholar
  2. 2.
    Vance Packard, The Hidden Persuaders (Pelican Books, 1957).Google Scholar
  3. 3.
    J. K. Galbraith, The Affluent Society (Pelican Books, 1973 ).Google Scholar
  4. 4.
    A. Dixit and V. Norman, ‘Advertising and Welfare’, Bell Journal of Economics, vol. 9 (Spring 1978 ) p. 1.CrossRefGoogle Scholar
  5. 5.
    As Comanor and Wilson point out, the issue is thus more complex than one of deciding whether advertising conveys ‘true’ information or deliberately deceives consumers. See W. S. Comanor and T. A. Wilson, ‘Advertising and Competition: A Survey’, Journal of Economic Literature, vol. XVII (June 1979).Google Scholar
  6. 6.
    See D. A. L. Auld, ‘Imperfect Knowledge and the New Theory of Demand’, Journal of Political Economy, vol. LXXX, ( Nov.–Dec. 1972 ).Google Scholar
  7. Figure 2.2 in the text and the analysis based on it is taken from Jeffrey James and Stephen Lister, ‘Galbraith Revisited: Advertising in Non-Affluent Societies’, World Development, vol. 8 (January 1980) p. 92.CrossRefGoogle Scholar
  8. 7.
    For an interesting application of this type of analysis to government regulation see C. Colantoni, O. Davis and M. Swaminathan, ‘Imperfect Consumers and Welfare Comparisons of Policies Concerning Information and Regulation’, Bell Journal of Economics, vol. 7 (Autumn 1976 ).Google Scholar
  9. 8.
    J. F. Engel, R. D. Blackwell and D. T. Kollat, Consumer Behavior, (third edn.) (The Dryden Press, 1978) p. 632 (emphasis in the original). They cite the example of ‘Wonder Bread’ which was held to be deceptive by the Federal Trade Commission because of its slogan, ‘How big do you want to be? Wonder Bread helps build strong bodies 12 ways’. The Commission argued that this claim was deceptive because of its implication that ‘Wonder Bread’ is more nutritious than other enriched white breads containing the same ingredients.Google Scholar
  10. 9.
    See E. A. Pessemier, Product Management: Strategy and Organisation (Wiley, 1977 ) p. 214.Google Scholar
  11. 10.
    For a discussion of the determinants of individual perception see M. D. Vernon, The Psychology of Perception, (second edn.) (Penguin, 1971 ).Google Scholar
  12. 11.
    R. E. Kirk and D. F. Othmer, Encyclopedia of Chemical Technology, (second edn.), vol. 6 (Interscience, 1963–70).Google Scholar
  13. 13.
    The following section is based on P. Wright and F. Barbour, ‘The Relevance of Decision Process Models in Structuring Persuasive Messages’, in M. L. Ray and S. Ward (eds.), Communicating With Consumers (Sage, 1976 ).Google Scholar
  14. 14.
    J. R. Bettman, An Information Processing Theory of Consumer Choice (Addison-Wesley, 1979 ).Google Scholar
  15. 15.
    M. Hollis and E. Nell, Rational Economic Man (Cambridge University Press, 1975 ) p. 54.CrossRefGoogle Scholar
  16. 17.
    The assumption that ‘experience simply overrules consumers’ previous opinions’ is criticised on the basis of a stochastic model by Y. Kotowitz, ‘Commentary’ in D. Tuerck (ed.), Issues in Advertising: The Economics of Persuasion (American Enterprise Institute for Public Policy Research, Washington D. C., 1978) p. 197 (see also chapter 6 below).Google Scholar
  17. 18.
    L. Festinger, A Theory of Cognitive Dissonance (Stanford University Press, 1957 ).Google Scholar
  18. 20.
    The discussion of the theory of cognitive dissonance in relation to consumer choice is based on J. W. Brehm and A. R. Cohen, Explorations in Cognitive Dissonance (Wiley, 1962 ).CrossRefGoogle Scholar
  19. 21.
    James F. Engel and M. Lawrence Light, ‘The Role of Psychological Commitment in Consumer Behavior: An Evaluation of the Theory of Cognitive Dissonance’, in F. M. Bass (ed.), Application of the Sciences in Marketing (Wiley, 1968 ).Google Scholar
  20. 22.
    See J. B. Cohen and M. E. Goldberg, ‘The Dissonance Model in Post-Decision Product Evaluation’, Journal of Marketing Research, vol. 7 (Aug. 1970) p. 316. Instead of what Greer calls the ‘robot model’ of consumer behaviour — that consumers learn to buy what they like after random sampling of alternatives — the operation of cognitive dissonance implies that ‘consumers quite often learn to like what they buy without any random sampling, especially in the case of experience goods’.Google Scholar
  21. See D. F. Greer, ‘The Economic Benefits and Costs of Trademarks: Lessons for the Developing Countries’, World Development, vol. 7 (July 1979) p. 689 (emphasis in the original). In a rare attempt to examine the welfare implications of the dissonance model he discusses briefly its relationship to the costs and benefits of trademarks (see also chapter 9).CrossRefGoogle Scholar
  22. 24.
    A summary of much of the research conducted in recent years is provided by R. A. Wicklund and J. W. Brehm, Perspectives on Cognitive Dissonance (Lawrence Erlbaum, 1976 ).Google Scholar
  23. 25.
    A recent survey of the marketing literature is by W. H. Cummings and M. Venkatesan, ‘Cognitive Dissonance and Consumer Behavior: A Review of the Evidence’, Journal of Marketing Research, vol. 12 (Aug. 1976).Google Scholar

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© Jeffrey James 1983

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  • Jeffrey James

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