Regulation, Advertising, and Economic Welfare

David L Kaserman and John Mayo

The Journal of Business, 1991, vol. 64, issue 2, 255-67

Abstract: This article explores how the standard analysis of the regulated firm is influenced once the ability of such a firm to advertise is recognized. The results demonstrate that incorporating advertising into the traditional model negates the well-known conclusion regarding the allocative inefficiency of regulatory equilibrium. The attainment of allocative efficiency is obtained, however, through the cost-increasing consequences of advertising. Consequently, an important question becomes whether the potential welfare gain from shifting output toward the point of minimum average cost outweighs the welfare loss of increasing that minimum cost. Accordingly, the article explores these welfare effects of such regulated firm advertising. Copyright 1991 by University of Chicago Press.

Date: 1991
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