A Critical Study of the Effects of Advertising: Analyzing the Figures of the Consumer Product Manufacturing Industry

ABSTRACT

Recently, despite the promotion of information acquisition-as a result of an increase in the volume of information and the amount of free time, as well as decreases in the cost of information-consumers are not increasing the amount of time they spend on information gathering. On the one hand, this phenomenon can be explained via a consumer-side (e.g. information receivers-side) "scarcity of time". On the other hand, it can also be explained from a businesses (e.g. information providers) perspective as a "scarcity of interest". In other words, within the flood of information, consumers' interest is lacking. In recent years, inter-company rivalry (specifically between companies that provide consumer goods and services) has assumed the mantle of a "competition for interest acquisition". In those fields where technological differences are not significant among companies, those who win the race of interest-acquisition will be deemed the "excellent companies" of our time.

Concerning the awareness of the above issues, this report investigates advertising expenditure, which is regarded as the representative method of capturing consumers' interests. With the hypothesis that "the effects of acquiring consumer interest through advertising seems to be increasing in recent years" as a point of departure, this report will test the proposed hypothesis by utilizing cross-section and time-series analyses.

By estimating the profit-contribution effects of advertising fees via cross-sectional regression analysis, it is clear that up until the present there has been a growing trend in the profits of advertising for the consumer goods manufacturing industry. However, whether or not advertising fees are directly related to results depends on the category of business. For example, the correlation between advertising expenditure and results for the automobile industry has strengthened in recent years, while the relation in the previously strongly correlated comestibles industry has weakened.

Though it can't be said that all advertisements are images, with television commercials and newspaper advertisements as the center of advertising, there is the strong possibility that this is increasingly the case. In the field of goods and services that customers have difficulty distinguishing between beforehand, image advertising is particularly effective. Following this line of thought, if we understand this criterion within the context of the above observations regarding industry-specific differences, it is clear that in the case of automobiles, the perceptible difference in quality between individual brands is very small, whereas recently in the food and beverage market there is the growing possibility for perceptual differentiation through the cultivation of new types of products. However, in order to prove this hypothesis, field investigations and other experimenting is necessary.

That the average profit contribution from advertising expenditures for the consumer goods manufacturing industry increases is in keeping with the results of cross-sectional estimates, but this does not necessarily mean that the relationship is causal. In other words, it is impossible to determine if (1) the performance of companies with high advertising expenses is particularly high, or (2) companies with high performance are using more advertisements than before.

A time-series analysis was used on each of 63 companies. A statistical causal relationship (Granger causality) between advertising expenditures and performance was found in approximately 1 out of 3 companies, whereas an inverse causality was also found in an equal number of companies. This indicates that the relationship differs slightly from an actual causal correlation. However, at the very least, it is clear that the statement, "advertising expenditures merely follow performance", does not hold universality. Once counted among the "3K"-transportation, socializing, and advertisement (from k?ts?, k?sai, k?koku)-the results of this analysis suggest that advertising expenditure is now in fact vital to modern business. Though the character of advertising expenditure has heretofore been regarded as merely following performance, it is clear that advertising strategy should in fact occupy an important part of business administration.

When looking at advertising expenditure and sales proceeds, another result shown by the time-series analysis is that for the sum total of industry as a whole, "advertising does not increases the pie as a whole in terms of sales". More specifically, individual companies' sales are increased only at the expense of taking the shares of other companies, and thus when viewed from a macroeconomic perspective, no creation of new consumer demand is observed.

For individual companies, advertising strategy is becoming increasingly important on the one hand, but as long as total demand does not increase, advertising costs have the potential of becoming trammels to companies as they struggle to measure up to each other. If rival companies are able to simultaneously reduce their expenditures, it would be much more beneficial for all involved; in other words, the competition for interest acquisition has a very high likelihood of becoming like the "Prisoner's Dilemma" of military arms buildup. When information acquisition is viewed from the passive consumer side, if consumers are content with the low level of utility resulting from image advertising, then from an economic welfare perspective it is equal to an inferior equilibrium. If the cost of advertising budgets leads to a shift in prices, then consumer welfare will decrease even more.

In a military arms race, disarmament treaties can be an effective countermeasure; in the world of inter-business competition, however, "the acceptance of advertisement-control cartels" is not realistic. This is because there is a high deviation incentive to break up cartels. One possible method of handling the external effects of advertising is through a tax system. Imposing taxes on advertising has been discussed for a long time, and the standard measure is to admit a certain percentage of advertising expenses as tax-deductible management cost. A policy measure such as this would imply that a framework is necessary in which the social cost of advertising (external diseconomy) could be shouldered by companies (internalization).