Working Paper: CEPR ID: DP1613
Authors: Massimo Motta
Abstract: This paper shows that an advertising ban is more likely to increase ? rather than decrease ? total consumption when advertising does not bring about a large expansion of market demand at given prices and when it increases product differentiation (thus allowing firms to command higher prices). In this case, the main impact of a ban on advertising is to reduce equilibrium prices and thus increase demand. It is argued that this is more likely to happen in mature industries where consumer goods are ex-ante (i.e. without advertising) similar and advertising is of the ?persuasive? type. The ban is more likely to increase firms? profits the weaker the ability of advertising to expand total demand and the less advertising serves to induce product differentiation.
Keywords: advertising bans; product differentiation; regulation; tobacco; alcohol
JEL Codes: K2; L13; L66; M37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Advertising Ban (M38) | Reduced Equilibrium Prices (D59) |
| Reduced Equilibrium Prices (D59) | Increased Demand (J23) |
| Advertising Ban (M38) | Increased Demand (J23) |
| Advertising Ban (M38) | Increased Product Differentiation (L15) |
| Increased Product Differentiation (L15) | Higher Prices (D49) |
| Higher Prices (D49) | Increased Demand (J23) |
| Advertising Ban (M38) | Reduced Perceived Substitutability (L15) |
| Reduced Perceived Substitutability (L15) | Lower Prices (P22) |
| Lower Prices (P22) | Increased Demand (J23) |
| Advertising Ban (M38) | Removal of Health Warnings (I19) |
| Removal of Health Warnings (I19) | Increased Consumption (E21) |