Advertising is the business of trying to persuade people to buy products or services.
It was defined in 1992 by Bovee as “Advertising is “the non-personal communication of information usually paid for and usually persuasive in nature about products, services or ideas by identified sponsors through the various media.”
It seems that wherever we go now were are bombarded with advertising. But is it good or bad for us?
Baron (Nicholas) Kaldor who was a famous Hungarian born British economist, said “advertising was a sinful activity which should be heavily taxed, like smoking, drinking, gambling and employment in service industries”.
Consider the adverts that you view:
- Will you be more attractive in a pair of jeans made by company A?
- Will you have more friends if you drink product B?
- Will your life be more fulfilling if you are seen wearing a pair of headphones by supplier C?
- Etc
In these instance then we might say that advertising is persuasive.
In economic theory such advertising has two impacts on the demand for a good or service.
1 It increases the demand for a product. There is a saying that there is no such thing as bad advertising, but Gerald Ratner might disagree.
2 It makes the demand for the product more inelastic in demand. This means that when the price of the product rises by say 10%, then we would expect the fall in sale to be less than 10%.
The world’s largest soft drinks company that have approx 22% of the world market share, disclosed worldwide advertising expenses of USD4.500 billion in 2025. It is clearly an important part of their business.
Others have argued that advertising has an important role is providing us with information. Public service advertising plays this role.
Public service adverts also influence the demand for goods and services. In the example of the advert above it is designed to increase the demand for a vaccination. Others might try to discourage the use of a production, eg cigarettes.
Next time you see an advert, try to decide whether it is persuasive or informative.
You might find most of the adverts that you see are neither persuasive or informative. In that case what is the purpose of advertising?
Richard Nelson suggested that the fact that a firm could spend money on advertising was all that mattered. It showed that a firm was committed to a market, if it wasn’t then it wouldn’t spend money on advertising.
So customers are right to believe that branded products are of good quality, not because the manufacturer claims that they are good quality – mostly they do not – but because there is little point in advertising branding products of poor quality.
Why did Baron Kaldor decide that advertising was a sinful activity?
He believed that advertising was a waste of economic resources for three main reasons:
The Inefficiency of “Persuasive” vs. “Informative” Advertising:
He argued that persuasive advertising among competitors selling virtually identical products yields zero net social utility. It merely shuffles demand from one firm to another while adding heavily to the final price paid by consumers. Remember the USD4.500 billion spent by one company alone in the soft drinks market in 2025.
The Destruction of Consumer Sovereignty:
Advertising is typically delivered to the consumer as a subsidized, “free” byproduct accompanying other media (like newspapers or broadcasts), it evades standard market testing. Kaldor pointed out that it is not supplied in response to actual consumer demand. Instead, it forces biased, selective, and excessively repetitive messaging onto the public, subverting the idea that consumers rationally dictate the market. We know that the more consumers hear a product name, when faced with a choice they will choose the product that they have heard of the most.
The Promotion of Monopolies:
He suggested that massive advertising budgets create significant economies of scale that only the largest corporations can afford. This raises massive barriers to entry for smaller, potentially more innovative competitors. This limits free-market competition.
Free to air TV channels are for the most part paid for by advertising, a lot of the social media content you view, is paid for by advertising, that free paper you pick up on your commute is paid for by advertising. Your local movie house will tell you, ticket prices would be even higher if it was not for the paid for trailers and adverts before the main event.
I will leave you with something else to consider. The products that are most heavily advertised are those where there is the most amount of information asymmetry. They also give you the least amount of information about the product.
| Information asymmetry (also called asymmetric information) happens when one party in an economic transaction possess more or better information than the other. |