Brand Pricing and Advertising

Abstract

Industrial organization theory posits that market structure influences a firm's opportunity to raise its product's price above its marginal cost. Most studies have explained the structure-performance relationship in terms of the ability of firms to collude in an industry protected by barriers to entry. An alternative theory is that the structure-performance relationship results from leading firms' relative efficiency. A third explanation, one that has not previously been explored, is related to the positive effect of brand advertising on brand price in consumer markets. The purpose of much advertising is to convince buyers that the brands they are purchasing provide the best value. In some products, consumers' preferences for high-priced brands have persisted in spite of credible evidence that competing brands are physically identical (concentrated lemon juice, evaporated milk, and household bleach), alternative brands are packaged under identical specifications by the same manufacturers (cookies), or buyers cannot distinguish their brand from lower-priced brands in blind taste tests (beer). The results of structure-performance studies of food manufacturing industries generally are similar to those found in other industries. Collins and Preston [3] found that sales concentration was positively related to industry price-cost margins across 32 food industries. Parker and Connor [21] found that advertising intensity also was positively related to food industry price-cost margins. Rogers [26] concluded that the impacts of advertising intensity and concentration on food industry price-cost margins had increased between 1954 and 1977. The Federal Trade Commission [10], Imel and Helmberger [14] and Ravenscraft [25] similarly conclude that profit rates of food manufacturing firms reflect the structure of the markets they serve and their relative position in those markets.