advertising change consumer behavior without changing tastes. Then, although adver-
tising may have some social value in an imperfectly competitive market, by raising output
it is clearly over-provided in equilibrium.
68
That persuasive advertising by a monopolist
is excessive remains valid under fairly general conditions, even if welfare is measured
using the post-advertising tastes. However, similar conditions also imply that the provi-
sion of quality information through informative advertising is excessive. By contrast,
informative advertising by a monopolist that makes consumers aware of the product’s
existence and attributes is clearly insufficient.
69
Allowing for consumer naivety is a natural way of explaining why ads do not inform
consumers or contain irrelevant items that might nonetheless influence the consumer’s
purchase decision. For instance, consumer unawareness explains why consumers may
end up paying more than their true willingness to pay, although this happens because
of a lack of advertising (because some unfavorable attributes remain hidden rather than
because advertising is used to manipulate as presumed by the persuasive view). Coarse
thinking, on the other hand, provides an alternative explanation where it is the content
of the ad that persuades consumers, although this could be attributed to a lack of infor-
mation on the part of the consumer as to the credibility of the language used rather than to
some bounded rationality.
The dynamic impact of advertising reflected in the accumulation of goodwill has
spurred a substantial amount of theoretical and empirical work. Much of the existing evi-
dence suggests a strong informative impact, in particular through an increase in consumer
awareness of the advertised product or brand. Theory also suggests that a product’s adver-
tising activity could be sustained merely because of consumers’ ongoing learning about
their match or the product’s quality. This ongoing learning could be all the more per-
vasive that consumers might not fully recall their previous experience with the product or
which product they previously consumed and liked, as suggested by
Nelson (1974) (see
Section 4.4.1). For instance, Deighton et al. (1994) find that advertising can have some
impact on consumers with some previous experience with the product, as long as that
experience is not too recent.
4.7. CLOSING COMMENTS
The profitability of advertising for firms is reflected in the amount that they are willing to
spend on it. Identifying the source of this profitability is a more intricate endeavor to
68
Dubois et al. (2014) study the impact of banning advertising on crisps in the UK on consumer welfare.
They find that the ban is detrimental to consumers under the complementary good approach, despite the
fall in prices, whereas consumers benefit from the ban when the post-ban tastes are assumed to be the true
tastes.
69
The result, however, may not hold for a multi-product monopolist for the same reason why a multi-
product firm may provide too many varieties (see
Tirole, 1988, chapter 2, subsection 2.2.2.2).
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Handbook of Media Economics
which this chapter attempts to contribute. I have tried to argue that much of the answer
has to do with the firm’s efforts to communicate information to consumers. Such infor-
mation may concern the product’s availability, its characteristics, or pricing. This is the
case even if ads are often perceived as containing very limited information, either because
the firm strategically selects to provide limited information or because the information is
indirect. This informative view is also consistent with the observation that much of the
content of advertising is completely uninformative. Indeed, any attempt at transmitting
information requires some communication strategy to catch the attention of the con-
sumer. Advertisers must compete for the consumers’ attention as emphasized by the the-
ories of information overload. Besides, even if consumers anticipate some benefits from
paying attention to advertisements, the benefits from processing the information in any
one ad may be small and advertisers must strive to make the cost of doing so even smaller.
Arguably, the non-informative content of ad messages may have a role of its own in
enhancing the attractiveness of the product, which may be interpreted as persuasive or as
a complementary good in the consumers’ preferences. Yet it does not seem necessary to
appeal to this non-informative dimension to account for much of what we witness as
advertising practices. Besides, there is much empirical evidence suggesting that the infor-
mative role of ads is quite significant, whereas the evidence in favor of some consumer
utility-related impact of advertising is not so compelling.
70
Still, we may remain skeptical
about the extreme consumer sophistication that is typically assumed in the information
provision approach. Allowing for less sophistication opens up the possibility of some
manipulation, which is somewhat consistent with the traditional persuasive advertising
viewpoint. A close look at the content of ads may also show that some of the claims
or the lack of some relevant information may only be understood as resulting from some
form of manipulation. Finally, it may be fruitful to have a broader interpretation of what
the relevant product information may be. For instance, in my discussion of coordination
in
Section 4.4.3 in this chapter I mention, for instance, fashion as a possible source of
consumption externality.
It is also quite clear that, besides being profitable, advertising contributes to social
welfare in markets with imperfect competition or imperfect consumer information.
The difficult question there is to evaluate whether market-provided advertising is insuf-
ficient or excessive. This chapter describes a wide range of arguments pertaining to the
determinants of ad expenditures as well as the determinants of the informative content of
advertisements, suggesting that there is no definite answer. Even if we only focus on con-
sumer welfare, the diagnosis remains ambiguous: although consumers benefit from being
better informed by making better choices, they may be penalized by higher prices
induced by more advertising (in particular when advertising provides product
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Arguably, economists are somewhat biased in favor of the informative approach for which economic the-
ory is better suited to provide an interpretation.
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Advertising in Markets
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