Sustainability of advertising expenditures and its relations to market structure

Abstract

Advertising has an important role in demand-generation and in market processes, and it has become a core asset of competition in developed markets. Because of this, both the amount and the growth of advertising expenditures have been significant in developed regions of the world. In consequence of the economic crisis, advertising expenditures decreased quickly and considerably, however, the recovery of advertising investments occurred in a short time. Yet the efficiency of advertising has generally declined, as there is over-advertising in many markets and only a little part of the advertisements can actually affect consumers. It is especially important to scrutinize advertising related to industrial organization. The relationship of advertising and competition is contentious. Some professionals think that advertising has an anti-competitive effect and that it makes market structure more concentrated. However, others disagree with this view. A new approach emphasizes that it is market power that affects companies' advertising expenditures. The role, the influence, and the financial investment in advertising are different in different market structures. Advertising is unnecessary in a perfectly competitive market where companies operate in oligopoly. In a monopolistic market companies spend large amount of money for advertising, as it supports product differentiation and in such a market there exists higher elasticity of demand with respect to advertising expenditure. Keywords: advertising, advertising expenditures, market structure, competition