Other Dimensions of Competition 381competition—where products are standardized and consumers already have
perfect information—would we expect advertising to be absent.) However, the
implications for firms and consumers (whether advertising enhances or blunts
competition) tend to work in opposite directions. Not surprisingly, a number
of commentators and policy makers have attacked pervasive advertising as anti-
competitive. (In novelist F. Scott Fitzgerald’s words, “Advertising is a racket. Its
contribution to humanity is exactly minus zero.”) However, it is mainly an
empirical question as to which aspect of advertising—its pro-competitive or
anticompetitive effect—tends to be stronger and more important.
There have been numerous research studies concerning the effect of
advertising in different industries over different time periods.^13 Overall, find-
ings are mixed. Advertising about price has been found to lower average prices
for consumer products, such as toys, gasoline, pharmaceuticals, and eyeglasses.
(For instance, consumers in states that ban eyeglass advertising pay higher
prices than consumers in states that allow it.) There is evidence that advertis-
ing (once vigorously fought by state and national bar associations) can lower
the price of legal services. In short, in certain markets, advertising plays an
important role in providing price information. However, there is also coun-
tervailing evidence that advertising and product differentiation can create
entry barriers and increase industry concentration and profits. (Here, the evi-
dence is somewhat mixed. Whether high levels of advertising cause increased
concentration or are caused by itis an open question.)(^13) A fine survey and discussion of these studies can be found in D. W. Carlton and J. M. Perloff,
Modern Industrial Organization,Chapter 14 (Reading MA: Addison-Wesley, 2004).
Collusion in the
Infant Formula
Industry
Revisited
We can use concepts developed in this chapter to shed light on the structure and conduct
of the infant-formula industry in the early 1990s. First, the industry was dominated by
three large firms that made up 96 percent of total sales, a clear triopoly. Thus, there
existed preconditions for the exercise of market power. Second, there is evidence that
leading firms enjoyed excess profits in the 1980s and early 1990s, profit margins of as
much as 25 percent above average costs. Third, the pricing behavior of the firms was strik-
ing: All had nearly identical patterns of price increases well in excess of the cost of milk
(the main ingredient in formula). The companies succeeded in these price increases
despite some decline in formula use (and a resurgence in breast feeding). Certainly, this
pricing behavior raises the suspicion of tacit collusion among the companies to maintain
orderly (and increasing) prices. Indeed, the Federal Trade Commission undertook an
investigation of these pricing practices for possible collusion.
The formula industry met a fourth acid test of entrenched oligopoly: The market
was insulated from competition by new entrants. Despite their size and prowess in other
markets, Carnation and Gerber have make few inroads in the U.S. infant-formula market.
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