THE COMPETITIVE AND ANTICOMPETITIVE THEORIES OF ADVERTISING

This study examines the anticompetitive and competitive theories about the effects of advertising on industrial profitability. According to the anticompetitive theory, higher advertising creates product differentiation and is a barrier to entry, which increases the industry profit rate. According to the competitive theory, advertising is informative and helps firms achieve efficiency, which consequently increases the firms' and the industry's profit rates.;Firm and industry regression models constitute the test for these two conflicting theories. In the firm model, the sample consists of 64 firms from 32 consumer goods industries. Observations were grouped into large and small firms and regressions for each group were run to test a set of hypotheses concerning these two theories.;The results from the firm model strongly support the competitive theory of advertising and reject the anticompetitive theory. Industry with greater advertising has some firms which are large and efficient earning higher profit rates than small firms. As more profitable large firms have a larger weight in the industry profit rate, the industry profit rate increases with increased industry advertising. Large and small firms have been defined using sales and assets criteria. Both of these criteria of classification strongly support the competitive role of advertising.;In the industry model, industries were grouped into low, intermediate and high concentration industries. Regressions were run for each group. The results again support the competitive role of advertising and reject the anticompetitive role of advertising.;The main objective of the study is to test the competitive and anticompetitive theories of advertising. The primary hypothesis is that if the anticompetitive theory of advertising is correct, then profit rates of both large and small firms will equally increase with higher advertising in the industry. On the other hand, if competitive theory holds, then the profit rate of large firms will be higher with greater industry advertising, while the profit rate of small firms will not.;In short, both firm and industry models lend strong support to the theory of efficiency of large firms rather than to the anticompetitive behavior of large firms in earning higher profit rates for themselves and for the industry as a whole.