Publication Date01 May 1978
This paper attempts to establish a number of criteria which may be used to
examine whether the claim of widespread 'self-cancellation' of advertising is
justified. A model incorporating these criteria is developed and empirically tested
using relevant Australian data.
In a competitive system where there is a large number of sellers and complete
knowledge on the part of the consumers, there is clearly no place for promotional
expenditure. Consumers are indifferent to rival sellers and competition can take
place only through the price mechanism. Consequently, advertising is seen as a
sign of imperfection of competition in an industry.
It is often argued that the basic role of advertising in modern capitalist
economics is 'market-defensive'. This implies that when any firm in an industry
embarks on an intensified advertising campaign, its competitors must step up their
advertising or other sales efforts to avoid a possible loss of market position. On
the other hand, if any firm decides to economize on its advertising budget, without
a compensating increase in some other aspect of its total selling effort, its exposure
is reduced and its share of the market may decline if its competitors do not follow
a similar policy. Competitive pressures may lead individual firms to increase their
advertising expenditure and the same pressures would also preclude their decreasing
it. Our aim is to examine this 'self-cancellation' property of advertising.
Let us assume the following market-share function for the ith brand.
ni1=4(v1, v, p11); i, j=l, . .. n, ij (1)
where mj = market share
y1 company advertising
= competitive advertising
= the ith brand unit price as a ratio of its competitor(s) unit (or average)
The function (1) is assumed to have the following properties:
em1/ev, >0; 2m/av? m1/v
Ipj/p1>1 m1/ep11 o
These properties state that company advertising has a favourable effect on its
market share; but there are diminishing returns. Competitive advertising has an
adverse effect on the brand's market share while the effect of price would depend
* I am indebted to Garnsey Clemenger Pty. Ltd., Marketing and Advertising Consultants,
Brisbane, and to the managing directors of the firms who assisted in supplying vital unpublished
data that made this research possible. I wish also to express my gratitude to my colleagues,
A. Anderson, G. Davy, R. Gunton, H. Higgs, R. R. Officer and G. West for their valuable
comments. Any (remaining) errors are, of course, my own responsibility.

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