Indonesia | Economics

Tuesday, August 22, 2006

Should we ban cigarette advertisements?

Source: http://www.redeyefrog.co.uk/Why do businesses advertise? To increase demand. So, if a particular industry is selling something whose consumption society would like to discourage – say, cigarettes – then banning such an industry to advertise is a good way to go. So for anti-tobacco lobby, the way to go is to ban cigarette advertisement. But what if many studies show that increased cigarette advertisements have little or no effect on demand?

Assuming that studies did show that advertisements have little effect on demand, Harold Winter (a non-smoker!) suggests a contrarian argument against banning cigarette advertisements. From his fun little book, Trade-Offs...:

[Those studies] who argue that cigarette advertising does not affect the demand for cigarettes have the burden of confronting a troubling question: Why do cigarette companies spend hundreds of millions of dollars on advertising?...

[Perhaps] cigarette advertising has a different purpose than enhancing the demand for cigarettes. Even if the overall demand for cigarettes is unaffected by advertising, tobacco companies may use advertising as a weapon in brand warfare… Advertising may be used to fight for market share, even if the size of the overall market is stable or declining over time.


Which leads him to this conclusion:

Ironically, if it is the case that all cigarette advertising is for brand warfare, a total ban on cigarette advertising may be beneficial to the tobacco industry. If advertising simply maintains the status quo in market shares, it is ultimately ineffective and the tobacco companies would save a lot of money by not advertising. But this wouldn’t last for long because each brand would have an incentive to start a big advertising campaign against its rivals. If advertising is banned, however, the government in effect allows the tobacco industry to eliminate wasteful advertising…”


Interesting, isn’t it? However, before making a hypothesis into policy (or use it to support the relaxation of advertising rules for cigarette firms), it’s quite important that we check that cigarette advertisements did not affect demand in Indonesia. Looking at the way firms advertise here, some show brand warfare tendencies, others demand expansion. Overall, however, it wasn't clear that the cigarette companies' aim is mainly that of brand warfare.

Economics is full of counterintuitive hypotheses such as this one – many of them, unfortunately, are dead wrong. To harness them into useful policies requires careful testing and evaluation.

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