Economies of Scale in Advertising Beer and Cigarettes

Abstract

The existence of economies of scale in advertising expenditures is usually regarded as a major contributor to the size distribution of firms in several industries. These economies can result from two groups of factors: (1) pecuniary economies of scale resulting from different prices for the advertising service charged to different customers (for example, discounts given to those firms who advertise heavily), and (2) economies of scale inherent in the production function of the advertising (for example, differences in the effect of the advertising messages supplied to the customers). The present article concentrates on the second source for economies of scale in two heavily advertised industries-beer and cigarettes. The beer industry faces the structure problem of national versus local markets. The cigarette firms sell their products in the same market; however, there is a continuing process of introducing new brands, a phenomenon which has some implications for economies of scale.

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