Is Gasoline Advertising Justified?

Competition in the gasoline retail market has increased considerably in the last few years, and the petroleum industry is spending larger amounts on advertising. This situation prevails in the Western European countries as well as in the United States.' In view, however, of the product and market characteristics, one could consider the proposition that the best of all solutions for the petroleum firms-as well as for the consumer-could be to suppress advertising altogether or to agree (implicitly) on the total advertising outlays and on a constant share of this total. The presence of active advertising competition observed within the petroleum industry contradicts this proposition. The purpose of this paper is to explore reasons behind these comparatively large advertising outlays. In a period where advertising is subject to criticism in various quarters, and while there is some hesitation among several economists regarding its welfare implications,2 it is not without relevance to investigate the economic and competitive effects of advertising in this market. The paper is divided in four parts. First, we describe briefly the characteristics of demand for gasoline, and we attempt to derive the implications of these characteristics on the role of gasoline advertising. Second, we confront these hypotheses with empirical data. Third, the profitability of gasoline-advertising investment is evaluated and discussed. The analysis is based on three markets, Belgium, Denmark and Italy, and covers the period 1961-69. Part IV is my conclusion.