What economists reveal about advertising’s complex pricing effects
Does advertising raise prices unjustly? Like most sweeping generalizations around such a multifaceted topic, the truth resists simplicity.
Key Takeaways
- Critics allege advertising needlessly raises costs. But researchers argue answers remain ambiguous.
- Harvard’s seminal study found advertising contributes somewhat to premium pricing but rarely excessively thanks to competition.
- Surveys show iconic brands earn predictable price premiums. Yet most categories offer low-priced alternatives.
- During deflationary periods, advertisers have cut prices to avoid losing market share.
- “Fair trade” agreements between brands and retailers outlaw loss-leader discounts, both protecting and restricting consumer choice.
- Historical lessons around unchecked advertising driving exploitation underscore the ongoing need for transparency and vigilance.
Renowned Harvard Business School professor Neil Borden once conducted an exhaustive study on advertising’s price impacts. He concluded that among a maze of factors, determining excessive profits and costs for branded goods proves slippery. Still, Borden offered guidance:
- Consumers require affordable choices including basic generics.
- Economic checks, e.g. competition, should prevent unreasonable advertising-related margins.
Overall, Borden found advertising contributes somewhat to price premiums, but rarely to an extreme degree. The more brands compete in a category, the less individual firms can leverage brand differences to overcharge.
In cosmetics and medicine, the desire for perceived better efficacy enables steeper markups. Among toothpastes, cream per-ounce prices ranged from 4 to 19 cents when Borden investigated way back in 1941. Deep-discount alternatives occupied shelves alongside premium national brands, keeping pricing sane.
Recent local surveys echo similar toothpaste price/value perceptions today. For instance, Colgate and Crest/Pepsodent still lead with roughly equal 28 percent consumer preference despite mid-tier options. Price-conscious folks can save bucks choosing private labels or lesser-known pastes. But the masses gravitate predictably to legacy brands balancing proven quality with emotional identity.
Does this exonerate marketers from manipulating certain buyers? Hardly. But it evidences a spectrum accommodating splurgers and bargain hunters alike.
During deflationary periods, advertisers have cut prices to avoid market share losses, as with 1930s cigarettes dropping from 15 to 9 cents a pack. Postwar inflation similarly forced cigarettes over 20 cents recently without any advertising role.
In states permitting it, “fair trade” agreements between manufacturers and retailers normalize prices, blocking larger chains from loss-leader undercutting. This frustrates cut-rate shoppers but protects indie stores and branding investment.
Fair pricing being fair
The questionable pricing tactics enabled by some advertising over the decades tie directly back to the push for accuracy standards covered previously. Just as regulation curtailed outrageous claims, consistent scrutiny of marketing-fueled margins retains importance.
Consumer education and visibility into accurate price-value comparisons remains vital as well. Advertising can artfully position perception value. Yet preventing outright exploitation of less-informed buyers continues requiring checks against unrestrained profit motives.
So while blanket assertions around advertising single-handedly inflating prices miss nuance, the roots of pricing misdeeds trace back to advertising’s past. As in other realms, the drive for openness, enlightenment and reasonable balance counters unfettered extremes. Just as progress depends on freedom, fairness relies on an informed populace, honest competition and consistency around rules.
Advertising’s price effects remain complex and situation-dependent. Honest promotion fuels competitive discovery of optimal values. But controls preventing gouging stay essential as pockets of vulnerability persist.
Like advertising itself, the truth on pricing stands multilayered and interdependent. But an overriding takeaway endures – maintaining checks and balances stays vital as opposing interests jockey for advantage.
