Advertising, brands, and prices

Advertising both persuades and informs. Informative advertising makes markets more competitive, reducing prices faced by consumers; persuasive advertising that reinforces brand loyalty segments markets and increases prices paid by consumers.

Paul Walker points to a new study looking at which effect dominates. From the VoxEU write-up:

I first show that the taxation of advertising is indeed a powerful instrument to restrict advertising expenditures of firms. I also show that advertising increased consumer prices in some industries such as alcohol, tobacco and transportation, in which the persuasive effect dominates. But it also decreased consumer prices in other industries such as food. I use data from existing marketing studies which make it possible to relate different responses of market prices to characteristics of advertisements in industries. I can indeed show that those industries which exhibit the informative price include more information in their advertisements, consistent with the interpretation of informational and persuasive forces of advertising.

I expect what's going on with persuasive advertising is mostly brand-loyalty reinforcement. The test for that would be whether the gap in price between branded and unbranded soft-drinks decreased with higher advertising taxes; that test isn't reported in the paper, and I'm not sure if it's feasible with their data. But it's at least a falsifiable hypothesis.

Most tobacco advertising is illegal; New Zealand is debating mandating plain tobacco packaging.* The tobacco industry's been pretty angry about plain packaging. If brand labelling mostly works to reduce competition across brands and to help maintain customer loyalty, we'd expect that plain packaging mandates will lead to a shift towards discount brands and lower prices absent further excise hikes. And that's also what Clarke and Prentice expect.** You can simultaneously have a policy anger the tobacco industry while increasing smoking if it pushes current smokers to discount brands, reducing the average price they pay and consequently increasing consumption while decreasing industry profits. The policy that's the enemy of your enemy isn't necessarily your friend.

The paper's overall result - that Klein-esque bans on advertising would really hurt consumers - likely won't change the no-logo crowd's views.

*Or, rather, the anti-tobacco groups were shouting a lot about the need for it, perhaps encouraged by MoH. Sometimes-lobbyist Carrick Graham points out the NGOs went quiet in preparation for the TPP talks' coming to town, implying that they're mostly client groups for the Ministry of Health and that MoH was leaned on a bit by Trade. It's an interesting hypothesis.

** And see discussion here.