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

This paper analyses the consequences of advertising in the children's breakfast cereal market. I take advantage of the fact that advertising directed at children is prohibited in the Canadian 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 suggests that the informative role of advertising dominates any persuasive role, since the most likely explanation for the higher prices is that the restriction prevented firms from announcing existence or characteristics and so from overcoming perceived differentiation. If advertising is informative, restricting it should increase the market shares of older, better-known brands and decrease the shares of newer and/or less well-known brands. Empirical analysis supports this prediction: established brands have higher shares in Quebec than in the rest of Canada, and the opposite is true for non-established brands