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.
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- Antonio Cabrales & Massimo Motta, 1996.
"Country asymmetries, endogenous product choice and the speed of trade liberalization,"
Economics Working Papers
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- Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
- Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 941-64, November.
- Kwoka, John E, Jr, 1984. "Advertising and the Price and Quality of Optometric Services," American Economic Review, American Economic Association, vol. 74(1), pages 211-16, March.
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