But advertising may encourage competition as well By providing information to consumers about prices, for example, it may encourage price competition Suppose a firm in a world of no advertising wants to increase its sales One way to that is to lower price But without advertising, it is extremely difficult to inform potential customers of this new policy The likely result is that there would be little response, and the price experiment would probably fail Price competition would thus be discouraged in a world without advertising Empirical studies of markets in which advertising is not allowed have confirmed that advertising encourages price competition One of the most famous studies of the effects of advertising looked at pricing for prescription eyeglasses In the early 1970s, about half the states in the United States banned advertising by firms making prescription eyeglasses; the other half allowed it A comparison of prices in the two groups of states by economist Lee Benham showed that the cost of prescription eyeglasses was far lower in states that allowed advertising than in states that banned it [1] Mr Benham’s research proved quite influential—virtually all states have since revoked their bans on such advertising Similarly, a study of the cigarette industry revealed that before the 1970 ban on radio and television advertising market shares of the leading cigarette manufacturers had been declining, while after the ban market shares and profit margins increased [2] Advertising may also allow more entry by new firms When Kia, a South Korean automobile manufacturer, entered the U.S low-cost compact car market in 1994, it flooded the airwaves with advertising Suppose such advertising had not been possible Could Kia have entered the market in Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 605