In light of the current importance of advertising, it is perhaps surprising that
advertising was a subject of little interest to the major economists of the 19th
century and before. What accounts for this? First, in the 19th century, a central
focus of economic research was the development of the theory of perfectly competitive
markets. This theory is not immediately suggestive of a role for advertising.
Indeed, under the traditional assumptions that consumers have fixed preferences
over products and perfect information, there is no reason for consumers to respond
to firms’ advertising efforts. Second, large-scale brand advertising did not
appear as an important feature of actual markets until the late 19th and the
early 20th centuries. Over that period, with technological advances in communication
and transportation, it became possible for manufacturers to achieve the
scale economies that are associated with mass production. Large-scale brand advertising
then began to appear, since it represented an important means through
which a manufacturer could stimulate demand for its brand.2
At the turn of the century, advertising was a thus a fertile topic for economic
research. An early reflection is offered by Marshall (1890, 1919). He distinguishes
between two roles that advertising may play. Advertising has a constructive role
when it provides information to consumers, so that they may satisfy their wants
at lower cost. But advertising also may play a socially wasteful combative role,
by offering little information and serving only to redistribute consumers from one
firm to another. While this distinction is useful, and foreshadows later insights,
Marshall did not pursue a formal integration of advertising into microeconomic
theory.
This task fell to Chamberlin (1933). In his theory of monopolistic competition,
Chamberlin models a firm’s advertising expenditures as a “selling cost” that
shifts out the downward-sloping demand for the firm’s differentiated product. He
accepts that advertising may provide information to consumers, and he allows,
too, that advertising may be persuasive and work to alter consumers’ “wants.”
Informative advertising better enables consumers to respond to price differences
and thus increases the elasticity of demand, but persuasive advertising creates
brand loyalty and thereby reduces the elasticity of demand. Scale economies play
an important role in Chamberlin’s theory, and he argues that such economies
2See Ekelund and Saurman (1988) for further discussion on the advertising and 19th-century
economists. The emergence of large-scale advertising is described by Border (1942), Chandler
(1990) and Pope (1983).
2