Advertising Restrictions, Competition, and Alcohol Consumption

KUMIKO OKUYAMA [*] Distilled spirits producers recently voted to eliminate their voluntary ban on broadcast advertising. The ban received public support because of the high social cost associated with alcohol consumption and the belief that advertising promotes alcohol consumption and abuse. In spite of this belief, the empirical evidence indicates that advertising has no significant effect on the market demand for distilled spirits. This evidence has led many policy economists to conclude that eliminating the ban will have no effect on alcohol consumption. The purpose of this research is to show that this conclusion is incorrect because it ignores the fact that advertising restrictions may affect industry competition as well as market demand. (JEL D4, I18, L66, M37) I. INTRODUCTION Distilled spirits producers voluntarily agreed to ban the use of radio advertising in 1936 and television advertising in 1948. The ban received little opposition because advertising is thought to increase alcohol consumption and generate social costs of more than $100 billion each year (U.S. Department of Health and Human Services, 1995). In recent decades, however, distilled spirits producers have lost market share to beer and wine producers, who have continued to use broadcast (radio and television) advertising. For example, the distilled spirits share of all alcoholic beverages fell from 6.3% to 4.9% from 1985 to 1995 (Brewers Almanac, 1990, 1998). This decline in share and an interest in competing on a "level playing field" motivated Seagram Americas to break the voluntary ban by airing a television commercial for its Crown Royal whiskey in June 1996. Other distillers followed with their own broadcast advertising, and on November 7, 1996, the Distilled Spirits Council of the United States voted unanimously to rescind its voluntary ban on broadcast advertising. (For an excellent account of the these events, see the National Council of Alcoholism and Drug Dependence, Inc. et al. [1997] and the Center for Science in the Public Interest [1998].) This vote has ignited a public policy debate regarding the impact of broadcast advertising on distilled spirits consumption. Concern with eliminating the ban is based, in part, on the belief that such restrictions reduce market demand and, therefore, alcohol consumption (Wallack, 1983; Martin, 1995; Hacker, 1998). The empirical evidence appears to dispute this belief, however. For example, a study by Nelson (1999) clearly shows that although beer, wine, and distilled spirits advertising affect brand choice, it has little or no effect on the aggregate demand for alcoholic beverages. Comprehensive reviews of the literature for the United States, Canada, and several European countries by Smart (1988), Fisher (1993), Calfee and Schergata (1994), and Bang (1998) generally confirm that advertising has no significant effect on the market demand for alcoholic beverages. Unfortunately, this evidence has led to the policy conclusion that advertising and therefore advertising restrictions have no effect on the equilibrium level of alcohol consumption. This is based on the presumption that because advertising has no significant effect on market demand, it cannot affect consumption. [1] For example, Duffy (1995, 575), who finds that advertising has no significant effect on the demand for beer, wine, distilled spirits, and tobacco concludes that "there is very little in our results to support the view that advertising restrictions, including complete bans, are likely to be an effective way of restraining the consumption of these products to any significant extent." This conclusion is incorrect, however, if an advertising restriction also affects the degree of price competition, a factor that is ignored in previous policy discussions of the impact of advertising restrictions on alcohol consumption. Although many have ignored the price effect of advertising in this policy debate, it has been discussed in the literature. …