Advertising Restrictions and Competition in the Children's Breakfast Cereal Industry

This paper takes advantage of the ban on advertising directed at children in the province of Quebec to study the effect of advertising in the children's breakfast cereal industry. Advertising is viewed alternatively as anti-competitive, if it increases brand loyalty, or as pro-competitive, if it acts a substitute for brand recognition. I construct a model of established and non-established brands in which advertising serves to inform consumers about the existence of brands. The model predicts that the effect of prohibiting advertising is to permit established brands to enjoy greater market share at the expense of newer and less well-known brands. This prediction is supported by the data: older, better-known brands have higher market share in Quebec than in regions where advertising is permitted and the opposite is true for non-established brands. This result suggests that in this market the effect of advertising cannot be to increase perceived product differentiation and reduce competition.
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