1. O. P.Taffs
How Can Advertising Influence Markets and Consumer Behaviour?
Oliver Taffs
Introduction
The subjectof advertisingineconomicsisone thathasgradually,butsignificantly grownin
importance overthe lastone hundredyears,developingfroman areaof discussionignoredbythe
majorityof economists,intoatopicthat playssucha prominentrole ingame theoreticmodelsand is
a vital part of businessstrategyinthe modernworld. Inthe 19th
Century,economists overlooked
complicated,oligopolisticmarketstructuresand concentratedalmost entirely onperfectly
competitivemodels.Inthese representations,advertisingwouldbe viewedasunnecessarywith
consumersassumedtohave access to all knowledge of the market. Asgoodsandservices were
thoughtto be perfectlyhomogenous, advertisingcampaignswouldbe counter-intuitive asconsumer
preferences couldnotbe reformed, andtherefore advertisingwouldbe justanextracostto the
producer. However20th
CenturyEconomists arguedindustrieswerenowhere nearassimplisticas
thisand believed therewere various barriersandmarketimperfectionsinthe real world,directly
contradictingthe assumptionsof perfectcompetition.
Today,it isclear advertisingiscentral tothe successof small,mediumandlarge enterprises,with
advertisingaccountingforover1%GDP inthe UK and US. Accordingto BusinessInsider(2010), total
advertisingexpenditure in the USgrossedover$131 billion andcitingVanderWurff (2008, pg. 44),
growthin TV advertisingspending isobserved evenduringperiodsof economicrecession.Thisnot
onlyimpliesthe importance businessesplace onpromotional campaigns,butalsogiveseconomists
an insightintothe possibleimplicationsthiscouldhave onbothmarketstructuresandconsumer
mannerisms. The mainobjectivesof thispaperare to directlyunderstandthe reasonsbehind
advertising–whatincentivisesfirmstopursue thesecampaigns?Inwhatway are consumers
influenced?Andwhatare the directand indirectconsequencesof advertising?Thispaperwill also
discussthe effectadvertisinghasonbusinessesandmarketstructures, studyingthe possiblebarriers
that couldarise fromfirmsspendingmore tomaximiseprofits,andexaminethe correlation between
advertisingexpenditure andmarketdominance.
The Economic Impact of Advertising on Consumer Behaviour
First,thisessaywill studyhowadvertisingimpactsthe consumer.Several economists suggestvarious
waysin whichadvertisingisable toimpact consumerchoices.The mainthree approaches, put
forward inBegwell’sstudy (2005),are that advertisingcanbe persuasive,informative,or
complimentary.
Advertising is Persuasive
The ‘advertisingispersuasive’argument hypothesises advertisingaltersconsumerpreferences,
creatingspuriousproductdifferentiationandbrandloyalty.Brandloyaltyisaconceptwherebya
producereffectivelycontrolsagroupof consumers,whoare extremelyunlikelytodeterfrom
purchasingthe goodsand servicesfromaproducer. Only significantinnovationsinproductdesign
viaanothermanufacturerwouldactuallyconvince consumers tochange theirpreferences. The

2. O. P.Taffs
persuasive argumentstatesincreasingadvertisingexpendituretoitsoptimal level will notonly
increase demand,butalsomake demandforthat product more inelastic,effectivelyallowingthe
producerto increase the price with considerably lessconsequence.If demandismade extremely
inelastic,alarge increase inthe price of the goodwill cause a relativelysmall decrease initsquantity
sold,allowingproducerstoattainhigherreturnsandnetprofit(figure 1).
An unfortunate aspectof advertising underthe
persuasive argumentisthatfirmsare able to exploit
consumersby manipulatingtheirpreferencesand,
to an extent,trickcustomersintobelieving there is
differentiationbetweenproducts inacertain
industry,wheninfacttheyare much closerto
homogenity. AccordingtoRobinson(1933, p.5),
“the consumerwill be influencedbyadvertisements,
whichplayuponhismindwithstudiedskill&makes
himpreferthe goodsof one producerbecause they
are broughtto hisnotice ina more pleasing&
forceful manner”.Thisquote sumsupthe
persuasive argument competantly,implyinghow
advertisinginspiresbrandloyaltyandallowsalready
establishedfirmstothrive ormaintainmarket
control,whereas withoutadvertising,theywouldbe
disciplinedbyacompetitivefree market.
AdvertisingisInformative
Anotherviewisthatadvertisingis‘informative’.Here,marketsare typicallycharactorisedby
imperfectinformation.Consumersgenerallybenefit fromadvertisingcampaignsastheyallow them
to make knowledgable and educated decisionsonpurchases. Withoutadvertising,consumerswould
be unable toselectthe bestpossible basketof goodsandservices whichsuittheirneeds specifically
due to a numberof outlyingfactors,suchas the cost of attainingall beneficialmarketinformation.
This‘cost’ couldbe monetary(i.e.payingformarketinformation),ortime-based(theopportunity
costs of searchingforthisinformation).Advertisingdirectlyfeedsconsumerswith thesedata,
revealingtothe consumerthe existance of abroad range of productsand prices,andallowingthem
to selectproductsthatbestsuittheirspecificpreferences.Notonlydoesthissignificantlyreduce the
cost of acquiringthismarketinformation,butitalsoreducesthe costof an individual’s purchasesor
evenallowconsumerstobuyhigherqualityproductsatasimilarprice,if possible.
Additionally,otherthan shiftingthe demandcurve to a more inelasticposition, the demand
curve will become more elasticasconstantadvertisementsallowconsumerstosubstitute one good
for anotherquickerif there were tobe a change in market prices.Anexample of this couldbe ‘price
wars’.Large brands,such as Tescoand Asda, lowerpricesfora shortperiodof time and continuously
pointoutvia televisionadvertisementsthattheirproductsare substantially cheaperthantheir
competitors.Thisgives consumersthe abilitytobuildacheaperbasketof goodsbasedonthese
Price
Q2Q1
P2
P1
Quantity
D1
D2
Blue dotted lines show market price &
quantity in equilibrium.
Red line indicates how a price change along
the second demand curve (D2) will reduce
quantity less (per unit), than a price change
along the first demand curve (D1).
D1: No Advertising; D2: Including
Advertising
[Fig. 1]
Supply

3. O. P.Taffs
pricesand theirutilitypreferences.Anarticle inthe Economist(2015) suggests some producersuse
price-matchingschemes,offering topaythe lowestmarketprice whichresults in‘tacitconclusion’
where businessesrealisepricesare betterlefthigh. Butfirms have lowered pricesinthe short-runto
estabishlong-termbrandloyaltyandthe extraknowledge available toconsumers through
advertisements canbe advantageousandlowertheircosts.
Advertising is Complimentary
Finally, there is the argument‘advertisingiscomplementary’. Inthiscase, consumersexhibit‘stable
preferences’ meaningmarketingcampaignscannotdirectlyinfluence orchange the type of goods
people decidetopurchase.Instead,advertisingcomplementswhatparticularconsumersare likelyto
purchase,puttingmore emphasisonwhatpeople value froma certainproduct.Thisview differs
fromthe persuasive argumentasadvertisingdoesnotdirectlyalteraconsumer’sutilityfunction,
and itis differenttothe informativeargumentasadvertisingcan improve utilitywithoutproviding
vital marketinformation.AccordingtoStigler(1977, p.88), “the householdismade tobelieve –
correctlyor incorrectly – that itgetsa greateroutputof the commodityfromagiven inputof the
advertisedproduct”. Effectively,the consumerismade tobelieve,throughadvertising,the goodis
worthmore to themthan it wouldhave beenpreviously,leadingthemtopurchase more of that
product.In mathematical terms,if we assume there are twogoods(X& Y),thenconsumerutilityis
U=U(X,Y).If producerswere toadvertise forgood‘X’,people wouldvaluethatgoodat Z= g(A). X.
The consumer’snewutilityfunctionwill be U’=U(Z,Y) andthereforeaslongas g(A)>1 (orZ>X), U’>
U.
Advertisingunderthe complementaryview maynotchange a consumer’sutilityfunction,
howeveritcouldbe usedtoentice consumersawayfromotherbrandssellingasimilarproductand
effectivelyestblishaformof brandloyalty. If advertisingis able toofferthe consumerastimulasto
receive more of whattheyalreadyvalue,customerswouldbe more willingtopurchase goodsfrom
the advertisingproducer,regardlessof the ‘real’difference inproductquality. The complementary
viewalsosuggests advertisingcouldbe usedinperfectlycompetitive markets.StiglerandBecker
(1977) propose advertisingmaybe usedby‘price-taking’firmstoshiftupwardsthe demandfora
productin a marketwithhomogeousgoods,allowingfirmstocharge a higherprice. Although
accordingto mathematical analysisof the compelementaryview,thisargumentiscorrect, itmay
alsobe suggestedconsumershave all knowledge readily available tothemina perfectlycompetitive
marketand so if goodsare homogenous, Zwouldequal Xandadvertisingwouldsolelybe anextra
cost. Anyincrease inprice wouldonlyleadtoconsumers purchasingfromacompanyofferingthe
same product at a lowervalue.

4. O. P.Taffs
Discussion
The degree of whichadvertisingispersuasive,complementaryor informative isarguablydependent
on the type of consumerswhoare exposedtothese adverts,aswell as industryconditions andthe
productstheyare promoting. Ina studyconductedby Ackerberg(2001), whenintroducing anew
type of yogurt,“Yoplait150”, to a sample of people inSouthDakotaandMissouri, he findsthere isa
positive andserial correlationbetweenTV advertising expenses andquantity sold.Salesof that
productwere foundto peakwhen advertisingincreased andhe concludedthe advertsaffected
inexperiencedconsumers(i.e.peoplewhodonothave pre-existingknowledgeof thisparticular
market) more thanthose whowere experienced. Forthe experiencedconsumers,he arguedthe
commercialsgave theminformationaboutthe product’scharacteristic(price,quality,etc),allowing
themto make a more educateddecisiononpurchases. Althoughone of the problemswiththis
experimentwasthatcouponswere available forthe productinMissouri at the time,andthusit is
not clearwhethertheyhadan external impactonthe buyers’ purchasingdiscussions,itcanbe
suggested consumerswithmore ‘experience’orknowledge of that particularmarketwill be
categorisedunderthe informativeview,whereasinexperiencedconsumerscouldbe manipulated
intoalteringtheiroriginal basketof goods.Therefore,advertisingtothemismore persuasive,
changingtheirutilitypreferences, orcomplimentarytotheirpre-existingutilityfunctions.
Additionally, itmaybe suggestedconsumershave changedthe waytheycollectmarket
informationandpurchase goods considerably overthe lasttwentyyears, particularlywith the
improvementof householdcomputingtechnologyandthe accessibilityof the internet.
Advertisementsfromcompanies,suchasCompare the Market and MoneySupermarketencourage
consumerstoresearchthe price and qualityof goodsand servicesbeforetheybuy,promisingto
save customershundredsof poundsontheirpurchases. These websitesgiveconsumersgreater
marketknowledge atlittleornoextracost. It can be arguedadvertisingnotifiesconsumers of the
possible savingsand a widerrange of companiesavailable onthe internet,makingadvertisement
more beneficialandinformative.Althoughitisperfectlyreasonable tosuggestthese companies
receive commission forthe informationtheyprovide andskew factsinfavourof certain companies,
shoppers are still made more aware of a diverse selectionof brands,enablingthemtolowercosts
and switchbetweenproducersmore freely, evenif marketknowledge isstill somewhat imperfect.
The Impact of Advertising on Consumer Surplus
To furtheranalyse the influence of advertising,we canstudy itseffectonconsumerandproducer
surpluses.Usingthe three approachespreviouslydiscussed,itmaybe suggestedunderthe
persuasive andcomplementaryviews, advertisingnegativelyaffectsconsumersurplusasitraises
demandforthat product,allowingbusinessestoincrease theirprice.Thisshrinks the gapbetween
whata consumeriswilling-to-payandhow muchtheyactuallyhave topay (reducingconsumer
surplusandimprovingproducersurplus).Alternatively, the informativeviewargues firmsaffectively
compete withone anotherthroughadvertising,attemptingtopromote theirproduct’sprice and
quality.Asconsumersbenefitfromthe extramarketknowledge andcanchoose the cheapest
possible goodsandservice,their surplus would increase.

5. O. P.Taffs
If we assume advertisingispersuasive,advertising canstill improveconsumersurplusprovided
the firmusesthe extraprofitto expandandreduce prices.Braithwaite(1928) acknowledgesthis
idea,suggestingthere isapossible“scale effect”where the successfromadvertisingcampaigns
allowsfirmstoexpand,innovateandimprove economies-of-scale.Thisreduces productioncostsand
allowsbusinessestoeitherretain the same marketprice andincrease marginal profit, orreduce
pricesto entice more consumers.Lowerpricescouldhelpestablishafirm’slong-termposition
withinanindustryandcouldpotentiallydrive existingfirmsoutif theyare unable tomaintain
competitiveness. Figure 2isa simplisticrepresentationof consumerandproducersurplusinan
imperfectmarket.The initial increaseindemandwouldusuallymeanthe firmshouldincrease its
prices,inorderto maximise profits. Howeverdue toeconomies-of-scale, the marginal costsof
production are reduced.The outcome isan overall fall inthe good’sprice andanincrease in
consumersurplus.
On the otherhand,Braithwaite (1928, p. 35) goeson to propose advertisingstill distortsconsumer
preferencesand manipulates themintopurchasinggoodstheywouldhave otherwiseavoided.
Consumersurpluscouldpossiblybe lowerif itis calculated“relativetothe initial (pre-advertising)
demand”. If we assume advertisingchanges consumerchoicesandpreferences,the price fall should
be greaterthan the distortionsin consumption generatedfromadvertising forthere tobe an overall
improvementinconsumersurplus. Begwell (2005,p. 10) usesa suitable graphto illustrate this
concept.In figure 3, if area ‘L’ islargerthan area ‘G’, consumersurplusisreduced eventhoughthe
price has decreased.
Q2Q1
P1
Q1 Q2
P2
P1
[Fig. 2]
MC = Marginal Cost; MR = Marg. Revenue;
AR = Demand. Producer can increase
quantity sold and decrease price. Orange
area displays the GAIN in consumer surplus.
Price
[Fig. 3]
G=Gain; L=Loss; D=demand
Again, demand curve shifts out and the firm
is able to charge a LOWER price.
However, Consumer surplus is REDUCED
when area G < area L (i.e. unless there is a
STRICT decrease in price, consumers are
worse-off).
D (2)D (1)
AR (D) [1]
Price
AR (D) [2]
P2
MR (1)
MC (2)
MC (1)
G
L
MR (2)
Quantity Quantity

6. O. P.Taffs
The Economic Impact of Advertising on Businesses & Market Structures
The nextsectionof thisstudywill focusonhow advertisingaffects the costsandprofitsof
businesses,aswell as marketstructures. AccordingtoCubbin(1981, p. 292), a profitmaximisingfirm
choosesto advertise atan ‘optimum’level.Figure 4developsonthisconceptandisa simplistic
construct of the relationshipbetweenadvertisingandprofitability. The persuasive view indicates
increasingadvertisingtoitsoptimal level will raisedemandandnetprofitsforafirm, allowingthem
to establishbrandloyaltyamongcustomers. Lambin’s(1976) proposes advertisingonlyhasa
minimal positive impactonindustrydemand.Thisimpliesexpenditure onadvertisingfromall key
competitorswithinanindustry diminishes the effectithasonsales.Inthe short-run,if acompany
increasedexpenditure,theywouldsee arelative increase indemandand revenue,however
overtime itscompetitorswouldreactbymatchingthisspending,whichwouldbringthe marketback
to itsoriginal state. Lambin’sargumentisusefulanditsvalidityisreinforcedbydatafrom107
individualbrandstestedin8differentcountries,thoughitisworthmentioningadvertisingcan
potentiallybenefitbusinessesinthe long-runif theyare able tomarketanew,innovative formof
technology.
An example of thiscouldbe Apple withthe launchof the IPhone in2007. Apple wasable to
establishthemselves,largelydue totheirpromotional techniques,asthe pioneer inthe new
Smartphone industry,withevenrecognised mobile phonebrands beingunabletocompete against
them.The firm’sabilitytoalterconsumerbehaviourandappeal tomobile phone customersmeans
IPhonesstill accountfor19.7% of the industry’smarketshare,accordingthe datafrom IDC (2014,
Q4). Despite smartphonesbeingfairlysimilarintermsof quality,the establishedbrandloyalty
actuallyleadspeopletobelieve inafalse sense of productdifferentiation –somethingthatis
difficulttoundo. Scherer(1980, p.260) proposes“withaninferiorimage,new entrants&fringe
firmsmaybe condemnedmore orless permanently toreceivinglowerpricesthanthose well-
establishedfirms”.AccordingtoInternationalBusinessTimesandThomasReuters(2013) data,
Samsungspentapproximately$14 billiononadvertisingalone,accountingfor5.4% annual revenue.
Apple onlyspentanestimated$1billion,proportionately0.6% revenue,yetbothfirmshave
obtainedasimilarshare of the marketwithSamsung only slightlyaheadwith19.9% despite an
extraordinaryamountof promotion.Leadingfirms are able tocharge more and promote less due to
pre-existingcustomerloyalty andentrants,who sometimes spendmore onadvertising,mayonly
receive arelativelyinsignificantlevel of demand.
Optimal
Expenditure
Optimal π
Profit[π]
Cost (Quantity)
of Advertising
[Fig. 4]
Indicates the profit maximising quantity of
advertising.
Firm is ‘under-advertising and should increase
expenditure to improve profits and market share.
Firm is ‘over-advertising. Decrease quantity.

7. O. P.Taffs
Additionally, Scherer(1980,p. 260) proposesextensiveadvertisingcampaignspreventsmallerfirms
fromexpandingorbeingable toestablish themselvesasathreat to incumbents. He arguesthere
may be a minimumthreshold level of advertising,whichif notmet,wouldmeanadvertisingfrom
entrantsmayhave little orno impacton consumerpreferences anddemand.Whenanalysing
advertisingexpenditure inmodernmarkets,itisclear these expenses accountfora large proportion
of the costsfacedby conglomeratesandmultinationals.AccordingtostatisticsonAdvertisingAge
(2005, 2011)1
, in 2003 General Motorsspent$3.43 billiononmarketingand promotingalone,andin
2010 JP Morgan Chase spent$1.92 billion.These substantial costs canmake it extremelydifficultfor
entrantsto survive orfindmarketsfinanciallyviable.If Scherer’sminimumthresholdisaccurate,
newfirmswouldhave tospend millionsof dollars,inordertoestablishacustomer-base.Thispushes
the cost of businessupdrasticallyandeffectively actsabarrierto entry evenif the incumbentfirms
are only advertisingtomaximise profitwithno intenttodamage competition.
Scherer(1980, p. 260) alsosuggestslarge recognisedfirms,withestablishedbrandloyaltyanda
significantmarketshare canspread costsovera largersalesvolume,preventingentrantsfrom
expanding. There isanopportunitycosttothis,asnew businessesare unable toconcentrate
expenditure onimprovingtheirproduct’squalityorimprovingthe productionprocesses inorderto
lowerprices.Onthe otherhand, largercompaniescanspreadthe cost of businessmuchmore
efficiently,allowingthemtoimprove theirproducts andservices whilstmaintainingadvertising
expenditure.Thisresultsinlarge incumbentssustainingtheirmarketposition,while reducingor
deterringcompetition.
Entry Barriers (Mathematical Analysis)
Usingan empirical approach,we cansee how advertisinghasthe potential tolimitcompetitionand
determarketentry. Thismodel utilisedbyJ.Cubbin(1981, p.290), assumes there are twofirmsin a
givenmarket:Anincumbent;andanentrant. Both businessesincorporate advertisingexpenditure
intotheirprofitfunctionsandact rationally.Advertisingnotonly affectsprices,butalsonegatively
affectsthe profit bothfirms are able to obtain.
(i) 𝑃𝑖 = 𝑃(𝑋𝑖, 𝑋𝑒, 𝐴𝑖, 𝐴𝑒),
[P = Price; X = Quantity;A = Advertising Expenditure; I = Incumbent;e= Entrant]
(ii) 𝜋𝑖 = 𝑃( 𝑋𝑖,0, 𝐴𝑖,0). 𝑋𝑖 − 𝐶.( 𝑋𝑖) − 𝐴𝑖
1 2011 Advertising Age statistics (JPMorganChase) were sourced via a BusinessInsider article. The source is providedin
the reference section.

8. O. P.Taffs
From (ii),itisnoticeablethe incumbentdoesnothave toconsiderboththe outputof the entrant,
nor doesithave to acknowledge the advertising expenditure of the new firm.On the otherhand, the
entrantmustrecognise the marketrequirementspriortoadmission andtherefore musttake the
incumbent’squantity [𝑓(𝑋𝑖)] andadvertisingcosts [𝑓(𝐴𝑖)] intoconsideration whencalculating
potential profit.The entrant forecasts (°)2
profitstobe:
(iii) 𝜋°𝑒 = 𝑃[ 𝑋°𝑒, 𝑓( 𝑋𝑖), 𝐴°𝑒, 𝑓( 𝐴𝑖)]. 𝑋°𝑒 − 𝑐.(X°e) − 𝐴°𝑒
Usingthisequation,we candeduce the incumbentis effectively able toblockentrywithagiven
combination of ‘X’and‘A’ that wouldresultin 𝜋𝑒 < 0.Thismeans the entrantisdependentonthe
incumbent’squantitysoldandthe extent,towhichitchoosestoadvertise. Withtheseconditions,
there isan asymmetrythatfavoursthe establishedfirm, implyingthe profitsforthe incumbentwill
alwaysbe greaterthan that of the entrantsimplybecause itdoesnothave to consider the new
firm’sprofitfunction,atleastinthe earlystagesof competition. Conversely,criticismsof thismodel
have beenmade due toits simplicity,even byCubbinhimself,asitissuggestedthe model is too
unsophisticated anddoesnotconsiderthe problemsof over-advertising,nordoesittake into
account howadvertisingmayvaryinindustrieswhereproductdifferentiationismore apparent.
Furthermore, asbrieflymentioned, Salop(1979) and othereconomistssuggest advertisingismerely
an “innocent”barriertoentry,withincumbentsonlyseekingtomaximiseprofit. If firmsare
assumedtooperate rationally,itwouldnotbe credibleforthemincrease advertisingexpenditure
beyondthispoint.Accordingtoanothermodel inCubbin’s(1981) paper, advertisingsignificantly
beyondorbelowthe optimal level notonlyreducesprofitforthe incumbent,butalsomake entry
easierfornewfirms.Infigure 5,we observe the incumbent’sisoprofitlines.The furthertheyare
fromthe centre,the lessprofitismaximised.Also,aswe move fromL1 to L3, entrantsare more
likelytoenterthe marketandthusover-advertisingwouldbe foolishonthe incumbent’sbehalf.
While the argumentiswidelyacceptedandpotentiallycorrect,itfailstoaddresshow the “optimal
level”couldpossiblybe $billions[i.e.General Motors(2003); JPMorgan Chase (2011)] and sothis
expenditure maybe significantburdenonsmallerfirms.
2 "°" Suggests figures are anticipated,and may not necessarily beaccurate.They are also dependent on the
levels of output, advertisingexpenditure and net profit the incumbent experiences.

9. O. P.Taffs
Cubbin(1980, p.295) also arguesadvertisingintensitydecreasesinmarkets where productsare
more differentiated. Althoughitisacceptedmarketdifferencesmayalterthe specificamountof
advertisingincumbents choose toapply, Cubbinsuggested asproductsbecome lessidentical,the
increase inadvertising/salesratio becomessmallerinresponsetoa threat. Bain(1956, p. 125), on
the otherhand, concludesthe single mostimportantbasisof productdifferentiation isadvertising
whichcouldallow established companies toearnsizeable profits. Itisarguable marketshave
evolvedoverthe pastsixtyyearssince Bain’sresearch,andwhen we considerthe developmentsin
technologyandthe wayconsumerscollectmarketinformation,makingthe studyless applicableto
modernindustry.Also,assuggestedbyBegwell(2005,p. 14), Bain doesnotclearlyexplainhow
“advertisingleadstoapreference forestablishedproductsandcreatesanentrybarrier”,which
bringsto questionthe validityof hisresearch. Regardless,if consumersare heavilypersuadedby
advertising, thereisapossibilityspuriousproductdifferentiation andbrandloyaltycoulddevelop,
and therefore incontrastwithwhatCubbinproposed,producerswould maintainhigh advertising
intensity regardlessof theirbeingany real productdifferentiation.
Correlation between Advertising Expenditure and Market Structures
Finally,Iwouldlike tofurtheranalysethe relationship betweenadvertisingexpenditure and market
dominance bydirectlylookingatstatisticsfrom multiple industries.The twomarketsfocusedonin
particularare the UK supermarketindustry,andthe USautomobile market. Studyingthe
smartphone industry, we found innovativeand recognised brandswereable tobuildupcustomer
loyaltyandcouldtherefore spendasmallerproportionof revenue onmarketingand promotion;
howeverexpendituresfromAppleandSamsungwere still over$1 billion perannumandbetween
themcontrolledalmosthalf the market.The UKsupermarketindustry showsevengreaterpositive
correlationbetweenpromotionalexpenditureandmarketdominance.Examining table 1andfigure
6, Tesco spentthe moston advertising(£91.5m) in2013 and benefittedfromthe highest market
share (25.4%). Infact, the four companiesthatspentthe largestonpromotional activitieswere able
to attainthe four highestlevelsof marketshare,whichfurtheremphasisesthe importance of
advertising.
A[D]
Q[i]
Optimal
Optimal, A[i]
Output
[Quantity]
Advertising
[Incumbent]
L1
L2
L3
[Fig. 5]
L1: Entry Blockaded;
L2: Entry Effectively Impeded;
L3: Entry Prevention
‘Unprofitable’
Π[L1] > Π[L2] > Π[L3]
[D] = Deterred, [i] = Incumbent
Q[D]

10. O. P.Taffs
Lookingat table 2 and figure 7, a representationof the USAutomobile industry in2013, we find
an almostidentical result,butwithasignificantlyhigherlevel of expenditure. Accordingto Statista
(2013), General MotorsCo. spentover$1.8 billionof advertisingthatyearandcontrolled18.8% of
the market.Again,the fourcorporationswiththe largestgrossadvertisingcostscontrolledthe
largestproportionof the market,withToyotaandChryslerspending$1.27 billionand$1.16 billion
respectivelyandattaining14%and11.7% marketshare in that order. Fordobtaineda noticeably
higherproportionof marketshare relative toitsadvertisingexpenditure,spending$1.13 billionand
acquiring16.4% of the market.Thismay be partially due tothe company’sUS heritage – the
companyhas beenpartof the US automobileindustryfordecadesanditmayhave establishedsome
sort of brand loyaltywithinthattime. Althoughitshouldbe notedcorrelationdoesnotalways
impliescausality,andtherefore we cannotbe certainorany causal link,there still isoverwhelming
evidence,in all cases;increasingadvertisingexpenditure positively correlateswithanincrease in
marketshare and dominance.
Companies Ad. Spending(UK) Turnover Ad Spending
(£m) (£bn) % of Sales
Tesco 91.5 48.2 0.5
Asda 84.3 22.8 0.2
Morrisons 70 17.7 0.4
Sainsbury's 53.6 25.6 0.4
Aldi 52.6 3.9 1.7
M&S 39.8 10 0.4
The Co-Op 26.2 13.5 0.2
Waitrose 23.3 6.1 0.4
Lidl 22.6 3.3 0.8
0
5
10
15
20
25
30
Fig. 6: UK Supermarkets, Market Share (2013)
Share (%)
Figure 6
[Data provided by
www.pangasius-
vietnam.com]
(2013)
Table 1
UK Supermarket
Industry, 2013
[Data provided by
www.thegrocer.co.uk
(2014)]
Sourced from Equibity/
TheGrocer

11. O. P.Taffs
Company Ad. Spending(US) Sales
($m)
General Motors 1,812 2,786,078
Toyota 1,275 2,236,042
FiatChrysler 1,166 1,800,368
Ford 1,138 2,493,918
Nissan 862 1,248,420
Honda 662 1,525,312
Hyundai-Kia 693 1,255,958
Volkswagen 527 407,704
Conclusion
In summary, itisabsolutelyclearadvertisingplaysanimportantrole incontemporarymarkets.21st
Centuryindustriesare predominantlyimperfectandafterstudyingthe subjectandlookingata wide
range of data, there isevidencetosupportadvertisingexpenditurepositively correlates tosalesand
marketshare.It can alsobe statedalthoughadvertisingmaybe an‘innocent’entrybarrier,the profit
maximisingquantityof expenditurecan substantially increasethe costof business,thusdeterring
entrantsand impedingcompetition. Of course,economicmarketstructuresvary acrossindustries
and therefore analysingonlyahandful of these will notgive usacomplete understanding asto how
advertisingisable toinfluence consumersandmarkets. However,notonlydoesadvertising
strengthenacompany’spositioninthe market, itcanalsohelpforma strong customer-base,
particularlyif acompanyis a pioneerorinnovatorof a new product. As previouslymentioned,the
0
5
10
15
20
Fig. 7: US Automobile Industry, Market Share (Feb.
2013)
Market Share (%)
Figure 7
[Data provided by
www.goodcarbadcar.net
(2013)]
Table 2
US Automobile Industry,
2013
[Data provided by
www.statista.com (2013)
& www.ibtimes.com
(2013)]

12. O. P.Taffs
extentadvertisingispersuasive,complementaryorinformative specificallydependson market
conditions andthe consumerstheyare influencing. Whenapplyingthe conceptstoexistingmarkets,
it maybe the case more experiencedoreducatedconsumersuse advertisingtotheiradvantage.
Theycan developtheirunderstandingof marketsandreduce theircosts,whereasinexperienced
consumerare susceptible tothese campaigns,tothe pointwhere theirpreferencesmaybe altered
or theyare ledtobelieve theywill gainadditional utilityfromagivenproduct. The accessconsumers
have to the internetprovides themwithmore marketinformationandhasthe potential toimprove
theirknowledgeof prices,allowingthemto reduce theirindividual costsand makingthemless
vulnerable topersuasiveormanipulative advertisingcampaigns. Althoughitmaybe unclear
whetheradvertisingbenefitsconsumersgenerally,itisreasonabletosuggest anoptimal levelof
advertisingisbeneficial tofirms –It givesthemaccessto a broaderrange of consumers, allowing
themto increase ormaintain demandanddefendagainstexistingcompetitorswhoare likelytobe
applyingsimilartactics.
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