Advertising is an expensive way of payment

Posted by Alexander Ginzburg on September 3, 2007
Filed Under Advertising |

Expensive Let’s see how a world with no advertising would look like. As usually, I’ll get in to my economic mood and start simplifying things. Let’s imagine a world in which people consume only TV content and Cola, for some of us it may not be so hypothetic. In this world there is only one TV station that is financed by advertising of the only two commercial companies: Coca-Cola and PepsiCo. In reality, Coke and Pepsi brands worth about 80$ billion all together. That means that they can charge us about 8$ billion above the competitive price annually, just for the brands (I’ve used a 10% capital discount rate but it really doesn’t matter, I’m just making a point). In addition, those two companies spend together about 4$ billion on advertising annually.

Let’s suppose that the legislator of this world decides to ban the soft drink advertising. Since in numerous blind taste tests, which were conducted over the years, neither of two drinks was consistently better than other, both manufacturers have no advantage over each other besides their image. Without advertising these images along with the brands would cease to exist. As a result, consumers would stop paying those extra 12$ billion every year for the brands and for their maintenance (about 20% of products’ price), and still would keep sipping the same Coke and Pepsi. The downside of this change would be the need to pay for the television content (directly or through taxes). However, earlier they had been paying extra 12$ billion while enjoying just a 4$ billion worth content (since that what the TV station had been receiving), and now they would have to pay for the content its exact value. Besides that, I claim that paying for information via advertising is less fair than paying for it directly and I will explain myself in the next post.