A communication activity used to influence potential buyers, voters or others who can help the advertiser to reach defined goals. For firms, it is a selling cost incurred with the hope of increasing sales. Advertising increases the amount of information available in a market but also helps to create monopoly situations as it can be a BARRIER TO ENTRY. The theory of MONOPOLISTIC COMPETITION was the first major economic theory to incorporate considerations of advertising. By advertising, OLIGOPOLISTS can create wants and markets, escaping the strictures of CONSUMER SOVEREIGNTY.
The annual amount of a firm’s advertising expenditure is often determined by an arbitrary ratio of advertising expenditure to sales revenue with the frequent effect of redistributing demand among the firms of an industry and adding to their costs, not of enlarging total expenditure on a particular good or service. Although large advertising expenditures are associated with MARKET ECONOMIES, advertising has a role in COMMAND ECONOMIES, particularly to increase consumer demand for products new to the market or in EXCESS SUPPLY.
References
Carter, M., Casson, M. and Suneja, V. (1998) The economics of marketing, Cheltenham, UK, and Northampton, MA: Edward Elgar.
Reekie, W.D. (1981) The Economics of Advertising, London: Macmillan.
Schinalensee, R. (1972) The Economics of Advertising, Amsterdam: North-Holland.
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