Advertising and the Labour-Managed Firm

Abstract

THE question of whether profit-maximizing firms (C-firms) advertise more than labour-managed firms (LM-firms) has been the subject of a recent paper by Steinherr [s]. He is concerned with extending the result attributed to Vanek [6] that if the LM-firm seeks to maximize income per unit of labour and does so by selecting labour input (L) and the level of expenditure on advertising and sales promotion (o), then the LM-firm will choose a lower level of L and a than the C-firm if the latter makes positive profits and ceteris paribus assumptions hold. The relevance of this result has been doubted by Meade [3, p. 4I3, fn. 2] who claims that advertising expenditure per unit of total output is the appropriate comparative statistic but sees no reason to believe that this will be lower in an economy of LM-firms than in one of C-firms. The ratio of advertising expenditure per dollar sales may also be an appropriate measure for comparative purposes especially since the advertising to sales ratio can be aggregated across products for multi-product firms and multi-product industries. Presumably it is arguments such as these that prompted Steinherr [5] to produce results pertinent to both advertising expenditure per unit of output sold and advertising expenditure per dollar sales. He concludes first that C-firms spend more on advertising per unit of labour input than LM-firms providing the conditions necessary to demonstrate Vanek's result, mentioned above, hold; and secondly that C-firms spend more on advertising per dollar of sales than LM-firms.1 Our present paper has two purposes. We will argue in section II that the implicit and explicit assumptions of Steinherr's model, and to some extent of Vanek's [6, p. 120-3] from which it follows, severely limit the general applicability of these conclusions. The second purpose of our paper is to suggest in section III that advertising expenditure per unit of output and per dollar of sales is a topic which is better treated by examination of the price and advertising elasticities of the demand function, following the classic analysis of Dorfman and Steiner [2].