ADVERTISING AND THE

PRICE OF EYEGLASSES
BY BHARGAVI SHROFF, ANANYA SHEE, AND ISHITA
GARG
Introduction
Monopolistic Competition
Advertising and Consumer Prices

■ The impact of advertising on prices has long been a matter of dispute. It has been
argued that the persuasive aspects and the product differentiation effects of advertising
tend to raise the prices of products to consumers. On the other hand, by providing
consumers with information about products and alternatives in the market, allowing
them to economize on search and to locate low-priced sellers more readily, advertising
may ten to lower prices to consumers. It may also lower prices by allowing sellers or
producers to economize on other merchandising costs and to take advantage of
economies of scale. On purely theoretical grounds, therefore, no reliable prediction can
be made as to the overall effect of advertising.
THE EFFECT OF ADVERTISING ON THE PRICE
OF EYEGLASSES
■ Lee Benham’s 1972 article, The Effect of Advertising on the Price of Eyeglasses, represents an early,
highly influential example of the now common empirical methodology in law and economics where
the variation between state laws permits natural “experiments” to study the effects of different
approaches to regulation.
■ Benham found that mean prices of eyeglasses in states that prohibit advertising by optometrists were
$6.70 (25 percent) higher than in states that did not prohibit such advertising. Cross-section
regression analyses also found significant increases in the price of eyeglasses in states with complete
restrictions on advertising, with average prices in such states $7.48 higher.
■ Benham’s main result was robust to the inclusion of a variable to control for entry restrictions. He
also found that mean prices for eyeglasses in states that banned only price advertising were higher
than in states with no restrictions, but lower than in states with complete advertising restrictions.
■ These striking results challenged the existing conventional economic wisdom that the costs of
advertising raised market prices. Benham provided tangible and concrete evidence of both the costs
of economic regulation to consumers and the likely beneficiaries of such regulation.
Lee Benham’s 1972 Article, “The Effect of Advertising on
the Price of Eyeglasses”.
■ In an article published in the Journal of Law and Economics in 1972, economist Lee Benham tested these
two views of advertising. In the United States during the 1960s, the various state governments had vastly
different rules about advertising by optometrists. Some states allowed advertising for eyeglasses and eye
examinations. Many states, however, prohibited it. For example, the Florida law read as follows:
■ “It is unlawful for any person, firm, or corporation to . . . advertise either directly or indirectly by any
means whatsoever any definite or indefinite price or credit terms on prescriptive or corrective lens,
frames, complete prescriptive or corrective glasses, or any optometric service. . . . This section is passed
in the interest of public health, safety, and welfare, and its provisions shall be liberally construed to carry
out its objects and purposes.”
■ Benham used the differences in state law as a natural experiment to test the two views of advertising. The
results were striking. In those states that prohibited advertising, the average price paid for a pair of
eyeglasses was $33. (This number is not as low as it seems, for this price is from 1963, when all prices
were much lower than they are today. To convert 1963 prices into today's dollars, you can multiply them
by 5.) In those states that did not restrict advertising, the average price was $26. Thus, advertising
reduced average prices by more than 20 percent. In the market for eyeglasses, and probably in many
other markets as well, advertising fosters competition and leads to lower prices for consumers.
Conclusion of Lee Benham’s Research
■ Several professors in economics and marketing at the University of Chicago were asked
whether they thought the price of eyeglasses would increase or decrease if advertising
were prohibited. Of those individuals approximately 40 per cent of the economists and 100
per cent of those in marketing expected prices to be the same or lower where advertising
was prohibited. It is, I think, the most common view to emphasize the costs of
advertising," the demand inducing and product differentiating aspects and to put relative
less emphasis on the information provided and the effects of this information on
organization and efficiency in the market. These results suggest that, at least for the item
considered, the emphasis has been misplaced. Prices we found to be substantially lower in
states which allowed advertising. The extent to which these results can be generalized to
other goods will have to await further study. Eyeglasses may of course be a special case
Nevertheless, on a question which has in the past been overwhelmingly judge on a priori
grounds, it has been possible to obtain a range of estimates of te impact of advertising on
prices