How Does Advertising Affect Market Performance? The Case of Generic Advertising

Abstract

The effect of advertising on market performance has been a long-standing debate. Advertising that increases the dispersion of consumers’ valuations for advertised goods raises the market power of firms, while advertising that decreases the dispersion of consumers’ valuations leads to narrower price-cost margins and superior performance in markets for advertised goods. Numerous challenges confound the empirical identification of advertising effects on market performance. This paper proposes a simple method that relies on the revealed preferences of firms participating in generic advertising programs. Generic advertising programs provide a unique window through which to observe advertising effects on market performance, because changes in the dispersion of consumers’ valuations systematically redistributes rents among firms according to observable characteristics on producer size. We examine producer attitudes towards generic advertising in the “Beef. It’s What’s for Dinner” campaign of the U.S. Beef Checkoff program and find the likelihood a producer favors an expansion of the advertising program increases in operating scale. This finding is consistent with advertising effects that have led to a decrease in the dispersion of consumers’ valuations for beef products and a commensurate increase in market performance.Advertising, Oligopoly, Marketing, L1, M37,