Are There Scale Economies in Advertising?

This paper provides new evidence on scale economies in advertising. Using 1970s data on sales and advertising expenditures of brands in 11 categories of small packaged goods, we find no evidence for the existence of a static relation between the size of the firm and its average advertising costs. Our results contradict those of several recent studies, most notably, Brown (1978), which claim that there are scale advantages to advertising expenditures for particular commodities. Our results differ because, unlike previous authors, we measure true scale advantages rather than output elasticities and because we use a sample composed of multiple-product groups rather than of a single commodity, cigarettes, which is atypical of the universe of advertised products. Advertising scale economies are defined as a static advertising cost advantage held by large firms. All policyoriented definitions must imply this relation. We suggest several measures of advertiser size that might be presumed to be related to advertising scale economies. Using brand-level data drawn from a variety of small packaged-product groups, we find no evidence that such a relation exists. If there is a correlation between advertising costs and brand size, our results indicate that it is more likely to be large brands that are at an advertising cost disadvantage. * Research support was provided by the James Webb Young Fund. We wish to thank Rajeev Batra for assistance in data processing. Helpful comments on previous drafts were provided by an anonymous referee as well as by workshop participants at the University of Western Ontario, Michigan State University, the University of Illinois, and the University of Michigan.