Paton, David John; (1997) The economics of advertising: A firm level study. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis is concerned with the economic effects of advertising. Perhaps the most significant barrier to empirical work in the UK in this area is the lack of reliable, published data. Thus, at the heart of the thesis is a firm level questionnaire which provided advertising data on 325 large and medium-sized UK firms. Following a review of the theoretical and empirical literature in the area, the main empirical part of the of the thesis begins with an analysis of the determinants of both the advertising decision by firms and their advertising intensity. In particular, the standard modelling of the inverse U-curve relating advertising to market structure is re-specified using survey data. Following on from this, the effect of advertising on firm profitability is investigated. Evidence is found that profitability is higher for firms in consumer based industries who advertise heavily. In addition, firms who do not advertise seem more likely to go into receivership than others. Related to the question of profitability effects, previous work that persistent effects of advertising disappear when firm fixed effects are taken into account is called into question. On the question of persuasive and informative advertising, the evidence in the this study suggests that only a small proportion of firms include any information on prices in their advertisements. Consumer firms and those operating in a very competitive environment tend to be more likely to include at least some price information. The last section of the thesis looks at the strategic use of advertising. Evidence is presented that many firms do adjust their advertising in response both to rivals and to changes in business conditions. In many cases, these responses are found to be asymmetric: increasing in response to booms or rival increases but not decreasing in response to recessions or rival decreases.

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