In the 1980s, the business world witnessed an epic battle known as the “Cola Wars” between two beverage giants, the Coca-Cola Company and PepsiCo. Fueled by intense competition, these companies engaged in a relentless advertising showdown to sway consumers. They sought to highlight apparent deficiencies in each other’s sugary drinks while chalking up the strengths of their own. A prime example of this was the infamous “Pepsi Challenge,” a blind taste test designed to demonstrate Pepsi’s supposed superiority when tasted without brand bias. But are attack ads effective?

Despite the ingenuity of these marketing tactics, the Cola Wars had unforeseen consequences. The continuous focus on product deficiencies eventually eroded consumer confidence in both brands. Negative advertising, once seen as a powerful tool for gaining a competitive edge, was now under scrutiny.

A study by Wharton marketing and economics professor Pinar Yildirim, along with Gorkem Bostanci from the University of British Columbia, and Kinshuk Jerath from Columbia Business School, sheds light on the implications of negative advertising on product variety, innovation, and consumer welfare.

“Once companies start attacking each other, it ends up destroying the whole product category and the whole industry seems to suffer.”— Pinar Yildirim

Attack Ads Can Erode Consumer Confidence

Real-world examples, including those from the pharmaceutical sector, illustrate that when companies engage in negative advertising, they often end up exposing the flaws in all products, leading consumers to compare brands based on these shortcomings. This, in turn, has detrimental consequences for the entire market.

“When you’re highlighting your competitor’s weaknesses, you can also bring to the mind of the consumer the similarities between yours and theirs,” Yildirim said. “Once companies start attacking each other, it ends up destroying the whole product category and the whole industry seems to suffer.”

For example, during the late 1990s, Unilever’s Ragu and Campbell’s Prego, both pasta sauce brands, engaged in a negative advertising battle that negatively impacted the entire product category. A marketing executive at that time revealed how the continuous decline led both companies to invest significant resources — approximately $60 million annually — in persuading consumers that the other’s pasta sauce was terrible.

This creates a “prisoners’ dilemma” scenario, where both companies would ideally prefer positive advertising if they cooperated. However, due to intense competition, they resort to using negative advertising instead. “Attack ads come in handy when you’re the only one doing it, but if everyone else follows suit it becomes harmful for the whole market. And the companies cannot easily come together and say, ‘Let’s stop this,’” said Bostanci.

Attack Ads Lead to Homogenization and Decline in Product Variety

Interestingly, the allure of negative advertising is more pronounced when products are distinct, the study found. Negative advertising motivates companies to design similar products to avoid resorting to attack ads later on. By steering clear, companies seek to reduce competition and minimize potential risks associated with attacks from rivals. This trend, however, leads to a decline in product variety and may hinder innovation, the authors say.

“Companies cannot easily come together and say, ‘Let’s stop this.’”— Gorkem Bostanci

“The threat of negative advertising can motivate firms to think about their product design element — and take a less risky, more conservative approach,” Yildirim said. “If you have very similar products and you highlight a competitor’s weakness, this can come back and hurt you in the end as you’ll likely have the same design flaws.”

The reduction in product variety arising from negative advertising has negative implications for consumers, the research found. With fewer choices available, customers may struggle to find products that perfectly align with their preferences, leading to potential dissatisfaction and compromises. Additionally, limited product variety can result in higher prices, as companies gain more pricing power in a less competitive market. “If innovation is reduced, that’s not necessarily good for the consumer,” Yildirim stated.

Consumer Welfare: Are Attack Ads Effectively Regulated in the U.S.? 

The study’s conclusions challenge the claims made by the U.S. Federal Trade Commission (FTC) that negative advertising fosters product improvement and innovation, raising questions about the effectiveness of current regulation. “There is a contrast between the statements from executives and the intended outcomes of the comparative advertising regulations in the U.S.,” said Yildirim. “The FTC has an encouraging approach, saying it may be informative for consumers and help them make better decisions.”

But its overall impact is often negative due to reduced product variety and stifled innovation, the paper concluded. Moreover, Bostanci pointed out that when companies curtail creativity, the need to take out attack ads is reduced. “So the information gains may be missing while consumers are still left with a smaller variety of products and potentially higher prices,” he said. 

Striking a balance between competition and consumer welfare remains a challenge that regulators and industry players will need to address, he added.