An ex ante evaluation of the effects of banning advertising on junk food markets

We develop a structural model to analyze the effects of banning advertising on demand, supply and market equilibria in junk food markets. We use transaction level data on the potato chips market and find that banning advertising does not lead to a reduction in demand because, while banning advertising reduces consumers’ taste for junk food, it also toughens price competition, leading to lower prices. Overall consumers do not lower calories from potato chips, but they are led to buy healthier varieties. We also consider the impact of the ban on consumer welfare, showing how to evaluate consumer welfare when advertising is persuasive and might lead consumers to take decisions that are inconsistent with their underlying preferences.