Advertising and Economic Welfare - Len M. Nichols
Publications Friday, March 1st, 1985Introduction:
Is advertising socially excessive? Economists have been reluctant to consider this question, for there appeared to be no rigorous method of analyzing cases in which advertising influences tastes. Some recent studies have made fundamental contributions to this debate (Avinash Dixit and Victor Norman, 1978; Yehuda Kotowitz and Frank Mathewson, 1979), but no consensus has emerged. Dixit and Norman were the first to establish a rigorous methodology. They evaluated social welfare (SW= consumer’s surplus + profits) under pre- and post-advertising market equilibria, using pre-advertising tastes for one ranking and post-advertising tastes for another ranking. When the SW rankings were identical, Dixit and Normal claimed that unambiguous inferences could be drawn. In general, they concluded that the profit maximizing level of advertising will be excessive under a variety of product market structures.
“Advertising and Economic Welfare,” American Economic Review, v. 75, #1, March 1985.
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