We have already discussed how advertising evolved in the previous century. Organisations built their business taking advantage of advertising. In a growing economy, there is more marketing and advertising spend and the consumers are favourably inclined to consume more. There is an overall growth in the sales revenue and media revenue. Advertising expenditure grew in India by leaps and bounds.

When the recession sets in, the first axe falls on the advertising expenditure. There are studies to show that if advertising is maintained in recession, the firm stands to gain from the competitor’s market share who is sluggish in advertising.

In a down turn, the media advertising agencies suffer as the ad expenditure is ourtailed or diverted elsewhere. Both the print media and electronic media are affected adversely. Agencies experience lower  billings and reduced profits.

The relationship between advertising and economy has two dimensions. Advertising is a major source of information for the consumers enabling them to exercise their choice from a wide array of products. Advertising is the only guide to the consumers to learn about the new products. The other dimension is the pull effect of advertising on the consumers who ask for the advertised product from the retailer. That is similar to exercising control over distribution and pricing. The consumer has to pay the price desired by the advertiser.

Thus there are views and counter-views regarding the role of advertising in the economy. Advertising does influence several economic elements including pricing, consumer demand and competition.

Pricing

The question is whether advertising increases the prices people pay for the products or reduces them. There are cogent arguments on both the sides. As advertisement is expenditure that is passed on to the consumer, naturally they pay a higher price. In addition, advertising takes away the market share of the competitive products, and so the competition increases its ad spend, and thus cycle of higher prices sets in. There is an entry barrier to the new comers, as they cannot match the financial muscle of the established players. Since competition is restricted, the higher prices do not come down.

There are counter-arguments. Advertising lowers the price by stimulating sales and raising productivity. The per unit cost of the advertises product is lower. Advertising keeps the buyers well informed about products and pricing. Buyers are in a position to take the comparative view and choose the brands which suit their purpose at the most affordable prices. In other words, advertising empowers the buyers to choose the suitably priced products. In some countries, even professional advertising of doctors, lawyers and accountants is legally permitted so as to augment competitive pricing.

Consumer Demand

The effect advertising on consumer demand is a complex issue. There are  a number of variables that can affect the demand — advertising being one of them. The other variables could be demographic changes, income and life style. However, one thing is crystal clear. Advertising stimulates the demand for a new product. Had it not been for advertising, it would have been difficult for the companies to market newer versions of smart phones and tablets.

In recent years, there is a growth in product categories, e.g. on-the-counter medicines. Advertising helps the companies to snatch a bigger portion of that growth.

Advertising is, however, helpless in reviving obsolete products, e.g. out-of-fashion garments, or manual typewriters.

Apart from stimulating demand, advertising can be used to subdue the demand for products in short supply, e.g. conserve energy, save water.

Advertising enables an organisation to defend its market share when the market is static.

Competition

Massive advertising of the leading firms cannot be matched by a new entrant, and hence it is said that advertising dampens competition. However, advertising can be used as a tool for entry into the new market by differentiating the product or by inviting attention to it. This calls for creativity and effective advertising. Just advertising is not enough to make a product competitive. There should be an improved product too, and advertising must get some reasoning to promote it. You have a good product, and you advertise it well. That is the formula for success. The combination beats the competition. Advertising slowly builds a brand by emphasizing its salient features and by establishing a connect between the product and the users.