Abstract
I show 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. I argue 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 ‘price-increasing’ type. The ban is the more likely to increase profits of the firms the weaker the ability of advertising to expand total demand and the less advertising serves to induce product differentiation.
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This is a substantially revised version of a working paper (Motta 1997) bearing the same title, and long forgotten in a drawer. I would like to thank H. Fickel and H. Savelkouls for stimulating discussions, A. Cabrales, A. Ciccone, R. Fauli-Oller, A. Holly, H. Hopenhayn, A. Irmen, J. Markusen, J. Miron, T. Nilssen, M. Polo, K. Stahl and T. Von Ungern-Sternberg, as well as seminar audiences at Lausanne, Mannheim, Louvain-la-Neuve, WZB Berlin, Lisbon (Univ. Nova) and Toulouse (European Economic Association Meeting) for their comments on previous drafts. Thanks also to the Editor, Victor Aguirregabiria, and two anonymous referees for their suggestions, as well as to Ilaria Masiero for research assistance. Financial aid from the Spanish Ministry of Science and Innovation (project ECO2010-15052) is gratefully acknowledged.
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Motta, M. Advertising bans. SERIEs 4, 61–81 (2013). https://doi.org/10.1007/s13209-011-0084-1
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DOI: https://doi.org/10.1007/s13209-011-0084-1