Advertising’s Elusive Economic Rationale: is there a case for limiting tax relief?

Driver, Ciaran (2015): Advertising’s Elusive Economic Rationale: is there a case for limiting tax relief? Forthcoming in: Journal of Economic Surveys

Abstract

Advertising and its effects have been debated for well over a century. In the last few decades a generally sceptical view of the benefits of advertising has been overturned by a series of academic advances in economics that detail a variety of ways in which advertising may affect the economy and society. This academic work has however been paralleled by a growing popular and political opposition to advertising and its social effects. In this article, the positive economic case for advertising is challenged by an assessment of the main channels of its influence and by a review of the associated empirical findings on its economic and wider impact. A policy response of limiting the tax deductibility of business advertising is explored.

• Item Type: MPRA Paper
• Language: English
• Keywords: Advertising; Policy; Economic Theory; Industrial Organization; Business Ethics
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; K - Law and Economics > K2 - Regulation and Business Law; L - Industrial Organization > L4 - Antitrust Issues and Policies; L - Industrial Organization > L5 - Regulation and Industrial Policy; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M0 - General

References

Ackerberg, D.A. (2001) "Empirically Distinguishing Informative and Prestige Effects of Advertising," RAND Journal of Economics, 32(2): 316-33.

Advertising Age (2014) <http://adage.com/article/guest-columnists/industry-mobilize-thwart-ad-tax-deduction-shift/245458/> accessed 24/02/2014.

Aghion, P., N. Bloom, R. Blundell, R. Griffith and P. Howitt (2005) ‘Competition and Innovation: An inverted- U relationship’, Quarterly Journal of Economics, 120(2): 701–728.

Anderson, S. P., and R. Renault (2006) "Advertising Content." American Economic Review, 96(1): 93-113.

Ashley, R., C. Granger, and R. Schmalensee (1980) “Advertising and aggregate consumption: An analysis of causality,” Econometrica, 48(5): 1149–67.

Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics: http://www.stanford.edu/~kbagwell/Bagwell_Web/adchapterPost082605.pdf published as: Bagwell, K. (2007) Handbook of industrial organization 3, 1701-1844, 581, Elsevier.

Bazillier, R., and Vauday, J. (2010) “The Greenwashing Machine: Is CSR more than Communication?” <http:// hal.archives-ouvertes.fr:hal-00448861>. Accessed 01.03.2014.

Belleflamme P. and M. Peitz (2010) Industrial Organization, Markets and Strategies, Cambridge MA. Cambridge University Press.

Bhatt, M.A. (2012) “Evaluation and associations: A neural-network model of advertising and consumer choice”, Journal of Economic Behavior & Organization, 82:1:236-255

Bittlingmaye , G. (2008) Advertising, The Concise Encyclopedia of Economics 2nd edn.: Library of Economics and Liberty.

Blackett, K. (2012) “TV advertising is in in danger of dying”, CEO MediaCom (UK), The Financial Times, Monday Sept 3rd.

Braithwaite, D. (1928) “The Economic Effects of Advertisement,” Economic Journal, 38: 16-37.

Brekke, K.R. and O.R.Straume (2008) Pharmaceutical Patents: Incentives for R&D or Marketing? CESIFO Working Paper No.2433.

Bresnahan, T.F. (1992) "Sutton's Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration," RAND Journal of Economics,23(1): 137-152.

Chen, Y., Y. V. Joshi, J. S. Raju, Z. J. Zhang, (2009) “A Theory of Combative Advertising”, Marketing Science 28(1):1-19. <http://dx.doi.org/10.1287/mksc.1080.0385>

Coase, R. H. (1977) “Advertising and free speech”, in Hyman, A. and Johnson, M. B. (eds), Advertising and Free Speech, Lexington MA, Lexington.

Corden W.M. (1961) A Tax on Advertising, London, London, The Fabian Society.

Cowling, K. and others (1975) Advertising and Economic Behaviour, Oxford, Macmillan.

Cowling, K., R. Poolsombat and P.R. Tomlinson (2011) “Advertising and labour supply: why do Americans work such long hours? International Review of Applied Economics Vol. 25, No. 3, 283–301.

Credos (2011) Advertising: What the UK really thinks, London, The Advertising Association.

Deloitte (2013) “Advertising Pays: how advertising fuels the UK economy” published with the Advertising Association, London. http://www.adassoc.org.uk/pdfs/AdvAss_Advertising_Pays_Report.pdf accessed 24.02.14

DeLong, J.B. and and L.H. Summers (1991) "Equipment Investment and Economic Growth," Quarterly Journal of Economics 106: 2 (May), pp. 445-502.

Dewatripont, M. and J. Tirole (2005) Modes of communication. Journal of Political Economy, 113(6):1217–1238.

Dukes, G., J. Braithwaite, J. Maloney (2014) Pharmaceuticals, Corporate Crime and Public Health, Edward Elgar.

Federal Communications Commission (2014) <http://www.fcc.gov/guides/program-background-noise-and-loud-commercials> accessed 28.05.2014

Fosfuri, A. and M. S. Giarratana, (2009) “Masters of War: Rivals' Product Innovation and New Advertising in Mature Product Markets” Management Science 55(2):181-191.

Gagnon M-A & J. Lexchin (2008) The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States. PLoS Med 5(1):e1. doi:10.1371/journal.pmed.0050001 <http://www.plosmedicine.org/article/info%3Adoi%2F10.1371%2Fjournal.pmed.0050001> accessed 24.02.2014.

Galbraith, J.K. (1958) The Affluent Society. New York: Houghton Mifflin.

Gates, B. with N. Myhrvold and P. Rinearson (1996) The Road Ahead (revised ed.). Penguin Books.

Gallo A.E. (1999) Food Advertising in the United States. America's Eating Habits: Changes and Consequences Edited by: USDA/Economic Research Service. Washington, DC, USDA;173-180.

Geller, M. (1952) Advertising at the Crossroads: Federal Regulation vs. Voluntary Controls, New York: The Ronald Press.

Goldwein, M., J. Stone and A. Rosenberg(2013) “Beyond Tax Expenditures”, Tax Notes, Committee for a Responsible Federal Budget <http://crfb.org/sites/default/files/beyond_tax_expenditures.pdf> , accessed 01.03.2014.

Grossman, G., and C. Shapiro (1984) “Informative Advertising with Differentiated Products,” Review of Economic Studies, 51, 63-81.

Grossman, V. (2008) “Advertising, in-house R&D, and growth”, Oxford Economic Papers 60, 168–191.

Hite, C., R .Hite and T. Minor (1991) “Quality Uncertainty, Brand Reliance, and Dissipative Advertising”, Journal of the Academy of Marketing Science, 19(2): 115-121.

Horstmann, I. & G. MacDonald (2003) "Is advertising a signal of product quality? Evidence from the compact disc player market, 1983-1992" International Journal of Industrial Organization, 21(3): 317-345.

Iwasaki, N., Y.Kudo, C.H. Tremblay and V.J Tremblay (2008) “The Advertising–price Relationship: Theory and Evidence” International Journal of the Economics of Business 15(2): 149–167.

Jung C. and B. Seldom (1995), “ The macro-economic relationship between advertising and consumption”, Southern Economic Journal 62, 577-587.

Kaldor, N. (1950) ‘The economic aspects of advertising’, Review of Economic Studies, 18, 1-27 http://restud.oxfordjournals.org/content/18/1/1.full.pdf+html

Kay, J. (1995) Foundations of Corporate Success, Oxford, OUP.

Kay, J. (1997) “Lemon Economics” The Financial Times, March 14.

Kopf, D., I. Torres & C. Enomoto (2011) “Advertising's Unintended Consequence”, Journal of Advertising, 40:4, 5-18.

Lambin, J. J. (1976) “Advertising, Competition and Market Conduct” in Oligopoly Over Time, Amsterdam: North Holland Publishing,

Landes, W. M. & R.A. Posner (1987) "Trademark Law: An Economic Perspective," Journal of Law and Economics, 30(2): 265-309.

Mankiw N.G. and M. Whinston (1986) “Free Entry and Social Inefficiency”, Rand Journal of Economics, 17(Spring):48-58. Market Logic (2014) <http://www.marketlogicsoftware.com/neuromarketing > accessed 24.02.2014

Marrano, M.G., J. Haskel and G. Wallis (2007) “Intangible Investment and Britain’s Productivity”, Treasury Economic Working Paper No. 1, London, HM Treasury.

Marshall, A. (1919) Industry and Trade: A Study of Industrial Technique and Business Organization; and of Their Influences on the Conditions of Various Classes and Nations, London: MacMillan.

Martin S (1993) Advanced Industrial Economics, Oxford, Basil Blackwell.

McCloskie D. (2010) “Bourgeois dignity and liberty: why economics can’t explain the modern world” MPRA paper 16805.

McKinsey and Co. (2012) “Advertising as an economic-growth engine: The new power of media in the digital age”, March, available at: <http://ovalordapublicidade.apan.pt/McKensey_FinalAdvertising_2012.pdf>, accessed 6.04.2014

Mehta, A. (2000) “Advertising attitudes and advertising effectives”, Journal of Advertising Research May-June: 67-72.

Meyerhoefer, C.D. and S.H. Zuvekas (2008) “The Shape of Demand: What Does it Tell Us About Direct-to-Consumer Marketing of Antidepressants?” The B.E. Journal of Economic Analysis & Policy, 8(2) : 1-34.

Molinari, B. and F. Turino, (2009) , Advertising, Labor Supply and the Aggregate Economy: A Long Run Analysis (November 15, 2009). Working Papers 09.16, Universidad Pablo de Olavide, Department of Economics. . Available at SSRN: http://ssrn.com/abstract=1155466 or http://dx.doi.org/10.2139/ssrn.1155466

OFT (2010) The Consumer’s view of the Advertising of Pricing Final Report, Office of Fair Trading, London.

Pagano U., Rossi M. A. (2009) “The Crash of the Knowledge Economy”, Cambridge Journal of Economics v. 33 pp. 665-683.

Parker, R.S and C.E. Pettijohn (2003) “Ethical Considerations in the Use of Direct-To-Consumer Advertising and Pharmaceutical Promotions: The Impact on Pharmaceutical Sales and Physicians”, Journal of Business Ethics 48: 279–290.

Pitelis, C.N. (1991) “The effect of advertising and investment on aggregate profits”, Scottish Journal of Political Economy 38(1), 32-40.

Pratten, S. (2001) “Coase on broadcasting, advertising and policy”, Cambridge Journal of Economics 2001, 25, 617–638. Ramello, G.B. and F. Silva (2006) “Appropriating signs and meaning: the elusive economics of trademark”, Industrial and Corporate Change, 15(6): 937–963.

Sandel M. (2012) What Money Can’t Buy: the moral limits of markets, London, Allen Lane.

Schmalensee, R. (1978) "A Model of Advertising and Product Quality," Journal of. Political Economy, 87, 485-504.

Schlosser, A. S. Shavitt and A. Kanfer (1999) “Survey of internet users’ attitudes towards internet advertising”, Journal of Interactive Marketing, 13(3):34-54.

Shavitt, S., Lowrey, P. M. & Haefner, J. E. (1998) “Public Attitudes Toward Advertising: More Favorable Than You Might Think” Journal of Advertising Research, July/August: 7–22.

Singh, S, M. Utton and M. Waterson (1991) “Entry-deterring strategies by established firms”, Working Paper, Department of Economics, University of Reading, UK.

Smiley, R. (1988) “Empirical evidence on strategic entry deterrence” International Journal of Industrial Organization, 6: 167-18.

Statisticbrain (2014) http://www.statisticbrain.com/television-watching-statistics/ accessed 24/02/2014.

Sutton J. (1991) Sunk Costs and Market Stucture: price competition, advertising and the evolution of market concentration, MIT Press, Cambridge MA.

Tax History Project (2014) “Should we tax advertising?” <http://taxhistory.tax.org/thp/readings.nsf/ArtWeb/E6C2E18E1E011AF485257BE400723DFB?OpenDocument> accessed 24.02.2014.

Tirole J. (1988) The Theory of Industrial Organization, Cambridge MA, MIT Press.

Tsang, M., Shu-Chun Ho, and Ting-Peng Liang (2004) “Consumer Attitudes Toward Mobile Advertising: An Empirical Study” International Journal of Electronic Commerce 8 (3): 65–78.

Veblen, T. (1915) The Theory of the Leisure Class: an economic study of institutions, London, Macmillan.

Vitorino, M.A. (2013) “Understanding the Effect of Advertising on Stock Returns and Firm Value: Theory and Evidence from a Structural Model” Available at SSRN: <http://ssrn.com/abstract=1842846 or http://dx.doi.org/10.2139/ssrn.1842846> accessed 24.02.2014.

Wengrover, .R. (2009) Should Advertising Remain a Tax-deductible Business Expense? <eJ7AwC&pg=PA14&dq=Sally+Ruth+Wengrover&source=gbs_selected_pages&cad=3#v=onepage&q=Sally%20Ruth%20Wengrover&f=false> accessed 24.02.2014.

Zhao Hao (2000) "Raising Awareness and Signaling Quality to Uninformed Consumers: A Price-Advertising Model", Marketing Science, 19(4): 390-396.