9.6: Concluding Comments

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Economists have long held that advertising has been a means of influencing consumer preferences in a manner that makes demand less elastic and gives further discretion in price setting. The argument here is that advertising is way for sellers to increase their market power in an imperfectly competitive market. This argument is not without merit but does not explain the breadth and differences in advertising messages observed in real world commerce. Furthermore, if this were the only purpose of advertising, it would be difficult to defend it as a valuable use of economic resources. Advertising would be doing nothing to make the economy more productive. Its sole purpose would be to transfer wealth from buyers to sellers and would probably worsen welfare losses that result from resource misallocation problems observed in models of imperfectly competitive behavior. As such, advertising would be a prime candidate for regulation or even prohibition under laws similar to those that prohibit collusion, price fixing, or other anti-competitive behavior.

Recent work in information economics has noted that advertising can facilitate consumer search and can provide believable signals about experience attributes that cannot be verified pre-sale. Economists are developing a deeper understanding of advertising and its role in a market economy. If advertising does aid search and mitigate problems of asymmetric information, then it plays a valuable role that can facilitate the functioning of markets.