The Impact of Advertising in the U.S. Sweet Confection Market

Janette Kitt
Kitt Consulting Group

Peter StrÄTer


INTRODUCTION

Early in the 20th century John Wanaker, former U.S. Postmaster General and prominent New York and Philadelphia retailer, declared, "I know half of my advertising is wasted, I just don't know which half" (Luo and Donthu, 2001). A continuous debate regarding the uses and abuses of advertising, its ability to change taste and preference (especially of children), to direct consumer demand toward categories and products that are not in their best interest, has ensued. Galbraith (1967, p. 83) seems to have been one of the first to address the issues scientifically claiming that, "If advertising affects the distribution of demand between sellers of a particular product, it must also be supposed that it affects distribution between products." Stigler and Becker (1977, p. 76) explaining "The New Theory of Consumer Choice," cite Galbraith (1958) as "the most famous of the economists who argue that advertising molds consumer tastes." They counter with "tastes neither change capriciously nor differ importantly between people." They argue that advertising is the input "knowledge" into the household that produces and consumes commodities. They continue that "advertising affects consumption not by changing tastes, but by changing prices" (downward). Duffy (1987, p. 1051) on Galbraith argues: "This view remains controversial, however, because in the spate of econometric studies which appeared in recent years, and which set out, in effect, to test the Galbraith hypotheses, results have been mixed and often conflicting." Chang and Green (1989, p. 483) refer to "the two schools of thought that have emerged with respect to how economists describe the economic effects of advertising on prices and price elasticity. One school views advertising as a form of persuasion that creates product differentiation, making the demand curve less elastic and leading to higher prices. The other school maintains that advertising produces additional information to consumers, thereby enhancing competition, making demand curves more elastic and leading to lower real prices." They conclude from their empirical data that advertising tends to lower the price elasticity and the income elasticity; the latter dominates because of its higher absolute values. Goodstein et al. (1997, p. 109) summarized the position of a number of scientists in a session on "Ads' Effects on Price Sensitivity" quite convincingly: "Instead of trying to address whether advertising provides market power or information, the set of papers presented in this session assumes that advertising has the ability to do either depending on the content of the ad." Tellis (2005, p. 165) agrees that the effect of advertising depends on the content of the messages and adds that "consistency among product, price, brand image, appeal, various cues, message, and the respondent's state enhances persuasion." Duffy (2003, p. 69) tested the influence of advertising on the inter-product distribution of consumer demand for nondurable goods and services in the United Kingdom from 1963 to 1996 and concludes that "There is very little evidence here to support the view that advertising (in the long run) is a potent force in the determination of consumer preferences and patterns of expenditure" and "There is little support for the hypothesis that advertising has the power to effect marked changes in the inter-product pattern of consumer demand." And finally, Ambler (2004) argues that "waste," the perceived extravaganza of an advertisement, contributes to advertising efficiency.