Advertising bans

Abstract

I show that an advertising ban is more likely to increase—rather than decrease—total consumption when advertising does not bring about a large expansion of market demand at given prices and when it increases product differentiation (thus allowing firms to command higher prices). In this case, the main impact of a ban on advertising is to reduce equilibrium prices and thus increase demand. I argue that this is more likely to happen in mature industries where consumer goods are ex-ante (i.e. without advertising) similar and advertising is of the ‘price-increasing’ type. The ban is the more likely to increase profits of the firms the weaker the ability of advertising to expand total demand and the less advertising serves to induce product differentiation.