The Economics of Advertising: A Reappraisal

Abstract

The traditional view of advertising is that it is economically wasteful and damaging to welfare as it distorts consumers' preferences, thus creating monopoly power for firms that produce heavily advertised brands. The alternative school of thought takes a broader view of competition and stresses the informative role of advertising. In a world characterised by uncertainty and ignorance, it is argued that advertising has a key role to play in providing consumers with information, reducing search costs and enabling them to make better informed choices. Further theoretical developments have stressed the importance of market structure, strategic interaction between firms and the role that advertising plays in this.