Advertising and consumer prices

Ferdinand Rauch, 13 November 2012

Advertising is expensive and thus raises the cost of goods, but it may encourage competition that keeps prices down. This column addresses the old question with data from a natural experiment brought about by tax harmonisation in Austria. It argues that on average advertising decreases consumer prices and estimates that if the 5% tax were abolished, consumer prices would decrease by about 0.25 percentage points.

There is an old debate in economic theory, which goes back at least to Marshall (1919), about whether advertising increases or decreases the prices of consumer goods. Some have argued that advertising provides information to consumers, such as information on prices or the existence of products (for example Butters 1977 or Stahl 1989).

Topics: Microeconomic regulation, Taxation
Tags: advertising, consumer prices, tax

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The invisible hand meets the invisible gorilla: The economics and psychology of scarce attention

Diane Coyle, 3 December 2011

Have economists been asleep at the wheel? This column reports from a conference on the psychology and economics of ‘scarce attention’. Among the ideas discussed is whether too much information can blind decision-making and whether this can explain why so many economists missed the warning signs of a crisis.

Since the financial crisis, many commentators have asked why so many economists failed to predict it – or even whether economics played a part in causing the crisis. A group of UK experts in 2009 attributed this failure to predict to a “psychology of denial” that had gripped the financial world as a whole.¹