Freeman

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Book Review: Advertising And The Market Process: A Modern Economic View by Robert B. Ekelund, Jr., and David S. Saurman

JUNE 01, 1989 by ROBERT W. MCGEE

Pacific Research Institute for Public Policy, 177 Post Street, San Francisco, CA 94108 • 1988 • 212 pages • $29.95 cloth, $12.95 paperback

Professors Ekelund and Saurman take the neo-Austrian view that advertising promotes human welfare by providing market information and lowering search costs. They see this view as a minority perspective, but one that is growing in popularity.

The majority perspective, espoused by Alfred Marshall, John Kenneth Galbraith, and others, sees advertising as wasteful at best and monopoly enhancing at worst. The authors show that the majority view of advertising is incorrect on several counts, and present one of the most thorough cases yet written for the neo-Austrian view. Rather than verging on the unethical and manipulative, advertising helps consumers to discover what goods and services are available.

The book starts with a foreword by Israel M. Kirzner, one of the leading exponents of Austrian economics. The first chapter traces the historical development of advertising and discusses the modern criticisms of mass marketing. As far back as the Middle Ages, advertising was regulated by government, which gave monopoly powers to those who were permitted to advertise. In France, for example, only town criers who were franchised by the government could advertise a Parisian tavern keeper’s wine. In England, the advertising tax helped retard the spread of literacy because it made newspapers more scarce.

Where advertising has been unhampered, consumers have benefited and markets have been more open. Restrictive practices, on the other hand, have tended to help established producers at the expense of newcomers. Far from being a barrier to entry, advertising is one of the principal means by which new competitors can enter a market.

For example, before cigarette advertising was banned from television in 1970, an average of one new brand a year successfully penetrated the market. Between 1970 and 1974, no new brand was successfully introduced. The beneficiaries of the ban were the firms with established brands. The losers were the companies that couldn’t introduce their products and consumers who never learned of the new products’ existence.

The theories that advertising raises overall profits and increases concentration ratios also are dismantled by Ekelund and Saurman. (Concentration ratios measure the sizes of the leading firms in an industry, versus the size of the entire industry.) Unrestricted advertising makes it easier to enter markets, which leads to increased competition and lower prices.

Ekelund and Saurman offer some telling examples: When Mattel started advertising toys on the Mickey Mouse Club television show in the 1950s, some toy prices dropped by 30 to 40 percent in areas where advertising was relatively frequent, while prices remained relatively stable in areas where advertising was infrequent or nonexistent. The prices of eyeglasses are lower where eye doctors haven’t been able to push through bans on commercial advertising. Legal services are cheaper where advertising is permitted. Unrestricted advertising also reduces the prices of drugs, gasoline, and numerous other products and services. There is even some evidence that the qualities of goods and services improve when restrictions on advertising are lifted.

The chief beneficiaries of advertising restrictions are established firms that already have a share of the market. They often defend these restrictions by claiming that advertising bans protect the consumer, who presumably isn’t capable of making rational decisions. But as Ekelund and Saurman point out: “There is no validity in the notion that consumers can properly evaluate proposed national policies when selecting officeholders but are somehow unable to choose between and evaluate the merits of two different cans of beans.”

Professor McGee teaches accounting at Seton Hall University

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June 1989

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