The “Brand Premium”: Measuring the Welfare Consequences of Advertising on Consumers

National brand and store brand products are often physically indistinguishable, yet consumers are consistently willing to pay more for brand names that they recognize. This “brand premium” is believed to be the result of multiple forces, including the level of consumer misinformation about differences between store brand and national brands that is generated by advertisements and marketing campaigns, the gain in consumer utility from purchasing branded goods, and potential subtle differences in the same product across brands.

Measuring the extent to which this brand premium is spurred by misinformation is crucial in determining the potential welfare loss created by the advertising industry, an industry valued at $140 billion annually in the U.S. alone. In “Do Pharmacists Buy Bayer? Informed Shoppers and the Brand Premium,” authors Bart Bronnenberg, Jean-Pierre Dubé, Matthew Gentzkow, and Jess M. Shapiro find that consumer misinformation amounts to a loss in consumer expenditures of $44 billion per year on national brand products with equivalent store brand alternatives.

The authors compare the consumer product choices of fully informed “experts,” such as chefs, pharmacists, and physicians, to the choices of a sample of uninformed consumers who shopped during the same time period and at the same store chain and location. This method allows the authors to isolate the impact that information has on whether a consumer chooses a national brand to a less expensive, store brand alternative.

Crépon, et al. find that expert information plays a significant role in consumer choices of most healthcare items and pantry staples, and becoming informed has striking potential welfare gains for consumers. For example, pharmacists buy store brand headache remedies 91 percent of the time, while uninformed households devote only 74 percent of their spending to store brands. In particular, uninformed consumers are three times more likely to purchase a bottle of Bayer aspirin for $6.29 than a physically equivalent CVS brand alternative for only $1.99. If consumers were given full information about headache remedies, consumer surplus would increase by four percent from the baseline, while the profits of national brand manufacturers would decrease by a substantial 19 percent.

Similarly, chefs purchase pantry staples that are store brand 77 percent of the time, as compared to 60 percent for an uninformed consumer. Full information about pantry staples such as flour or sugar would improve consumer welfare by three percent. Interestingly, across all food and beverage related items, chefs are only two percent more likely to purchase store brands on average than an uninformed consumer, reflecting the differing roles that information can play across product types. Although misinformation has a more distortionary effect in the healthcare industry, the necessity of food and beverage items in a household makes any welfare loss from these products a cause for concern.

While these findings are noteworthy, the authors stress that further research is necessary to capture the welfare effects from dynamic adjustments in the market. In particular, if consumers were given full information, manufacturers of national brands would decrease their level of spending on advertising, potentially reducing the distortionary effects of branded marketing campaigns. Further, the limited role of information in affecting consumer choices for most food and beverage products likely reflects other drivers of the “brand premium,” such as actual differences in product quality and emotional satisfaction from purchasing brand name items.

Article source: “Do Pharmacists Buy Bayer? Informed Shoppers and the Brand Premium,” Bart Bronnenberg, Jean-Pierre Dubé, Matthew Gentzkow & Jess M. Shapiro, National Bureau of Economic Research, Working Paper, August 2014.

Feature Photo: cc/(Evan Cooper)