From the standpoint of advertising as information, sometimes known as the “market competition” model, the economic role of advertising is to provide information to the marketplace. This model assumes that consumers are quite active, seeking new products and brands; they look to advertising for information and are more price sensitive, which forces advertisers to be more careful about how much they charge for their products. This holds prices in check and encourages competition as more companies enter the marketplace, using advertising to create awareness for their offerings.
In this school of thought, advertising is considered an incentive for companies to be innovative and compete vigorously. Many new products introduced in the past 10 years have succeeded, in part, because advertising was used to increase consumer awareness of their existence, which in turn increased demand. Examples include personal computers, satellite television, computer online services, and new cars and trucks such as minivans or sport utility vehicles.
As you can see, the distinctions between the two models reflect somewhat negative or positive views on advertising’s role in society, respectively. Under the market power model, advertising is helping to shape society by raising the cost of goods and services. Because consumers are less price sensitive, that allows companies to charge more for what they are selling. In contrast, the information model tends to view advertising’s role in society more positively, seeing it as a relatively benign influence that merely offers information to consumers. In doing so, advertising is really reflecting the value of brands and allowing consumers to make their own decisions, which will encourage greater competition in the marketplace and keep prices in check. The difficulty with either approach—and with assessing advertising’s economic impact in general—is that it is very hard to measure accurately. Because advertising is usually just one of many variables that impact a consumer’s decision over which brand to buy, it is almost impossible to determine advertising’s precise role in that process.
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Informative Advertising
