The Effects of Banning Advertising on Demand, Supply and Welfare: Structural Estimation on a Junk Food Market

48 Pages Posted: 2 Jun 2014

See all articles by Pierre Dubois

Pierre Dubois

University of Toulouse 1 - Toulouse School of Economics (TSE)

Rachel Griffith

Institute for Fiscal Studies (IFS); University of Manchester; Centre for Economic Policy Research (CEPR)

Martin O'Connell

Institute for Fiscal Studies (IFS)

Date Written: April 2014

Abstract

Restricting advertising is one way governments seek to reduce consumption of potentially harmful goods. There have been increasing calls to apply a similar policy to the junk food market. The effect will depend on how brand advertising influences consumer demand, and on the strategic pricing response of oligopolistic firms. We develop a model of consumer demand and dynamic oligopoly supply in which multi-product firms compete in prices and advertising budgets. We model the impact of advertising on demand in a flexible way, that allows for the possibility that advertising is predatory or cooperative, and we consider how market equilibria would be impacted by an advertising ban. In our application we apply the model to the potato chip market using transaction level data. The implications of an advertising ban for consumer welfare depend on the view one takes about advertising. In the potato chip market advertising has little informational content. The advertising may be a characteristic valued by consumers, or it may act to distort decision-making. We quantify the welfare impacts of an advertising ban under alternative views of advertising, and show that welfare conclusions depend on which view of advertising the policymaker adopts.

Keywords: advertising, demand estimation, dynamic oligopoly, welfare

JEL Classification: L13, M37

Suggested Citation

Dubois, Pierre and Griffith, Rachel and O'Connell, Martin, The Effects of Banning Advertising on Demand, Supply and Welfare: Structural Estimation on a Junk Food Market (April 2014). CEPR Discussion Paper No. DP9942. Available at SSRN: https://ssrn.com/abstract=2444965

Pierre Dubois (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Rachel Griffith

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

HOME PAGE: http://www.ifs.org.uk/people/profile?id=37

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martin O'Connell

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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