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

In this article I analyze the consequences of advertising in the children’s breakfast cereal market. I take advantage of the prohibition on advertising directed at children in the province of Quebec to examine the nature of advertising and to determine whether the restriction hinders competition. I show that prices are higher in Quebec than in Canadian provinces that permit advertising. This finding suggests that the informative role of advertising dominates any persuasive role, since the most likely explanation is that the restriction prevented firms from announcing products' existence or characteristics and thus from overcoming perceived differentiation. If advertising is informative, restricting it should increase the market shares of older, better-known brands and decrease the market shares of newer and/or less well known brands. Empirical analysis supports this prediction: market shares of established brands are larger in Quebec than in the rest of Canada, and the opposite is true for nonestablished brands.