6 - Oligopoly and advertising

Summary

Advertising can be viewed from any of several vantage points. In the sections that follow, the central focus is on the way in which advertising enters the demand functions of the firms in a market and, further, the effect of advertising on market equilibrium. Advertising also raises interesting and important questions touching on ethics and welfare. For example, can consumers' buying habits be so thoroughly manipulated by advertising that the large firms of the economy can virtually dictate tastes? Ought advertisers to be subject to laws that force them to be truthful, or even prevent them from making misleading claims? Can it be said that the presence of advertising increases or decreases consumer welfare in the economy?

Such ethical questions are beyond the scope of this study, and this chapter is not intended as an implicit or explicit statement concerning them. It is surely true that the amount of output a firm can sell at a given price is affected by the level of its own advertising and, often, by the advertising efforts of other firms selling similar products. Will the sales of a firm be increased or diminished by the advertising of a rival? Will the advertising expenditures of a firm in the current period carry any benefits into the future, or are they totally realized in the current period? How is the nature of market equilibrium affected by the extent to which advertising is cooperative or predatory?