Introduction advertising unit Structure

Table 3 : Effect of Advertising on Consumer Price 
Particulars
Before 
After 
Advertising 
Advertising 
Per unit cost of production (Table 1)Rs. 1.00 Rs. 0.80 
Per unit cost of distribution (Table 2)Rs. 0.50 Rs. 0.40 
Profit margin Per unit (Assumed) Rs. 1.00 Rs. 1.10 
Consumer Price 
Rs. 2.50 Rs. 2.30 
Advertising affects consumer prices because: 
(a) Price is fixed by adding the desired profit on costs of production. 
Advertising is one of the elements of cost. Price of a product or 
service, therefore includes advertising cost. 
(b) Advertising is an element of distribution cost. An increase in 
advertising cost increases, total cost which increases the price of 
advertised goods or service. 
(c) Advertising cost increases due to competition. So, prices rise. 
However, under certain conditions, advertising checks prices.
Severe competition makes a producer struggle to increase his 
market share by charging reasonable prices. So, even if a price-rise 
occurs, his freedom to raise the price is controlled by competition. 

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Raising prices is also difficult because of government rules on 
trade and business. This forces a producer to reduce costs and not 
to raise prices.
(d) Advertising acts negatively to keep prices down. It first creates 
demand for a „brand‟ and, finally makes it popular. So, „brand 
loyalty‟ emerges and the consumers want the specific brand only. 
Therefore, since the producer enjoys the respect of consumers, he 
cannot lose it by raising prices. 
(e) Greater advertising may lead to greater demand and expansion 
of markets. The producer then finds that greater demand permits 
production only on a large scale, and with greater economies. If he 
passes these economies to the consumers, prices fall. Here, 
advertising is indirectly responsible for a fall in prices. 
(f) Through good advertising, other selling costs may fall such as 
cost of personal sales, point-of-sale displays. Therefore, prices fall. 
(g) Advertising does raise price, but consumers are willing to pay it 
for the brand of their choice. The consumer must pay a higher price 
if he wants a better product. His reason, not his emotions, guides 
him to choose a better product. So, advertising can succeed by 
appealing to reason. 
Competition comes from other advertised brands, unadvertised 
brands, and private brands or from substitute and alternative types 
of product. Competition is a powerful influence on a seller‟s prices. 
Incidentally, unless there were advertised brands, the prices of 
unadvertised brands would most probably be higher. The key issue 
is not whether advertising adds to the consumer price of a product. 
The key issue is whether advertising makes the consumer pay 
more for the same amount of satisfaction.