The Concise Guide To Economics
by Jim Cox
13. Advertising
Advertising has been given a bum rap in economic theory. Aside from any inherent bias against the free market itself, the reason for this is the theory of perfect competition. Once the economist perceives the world through "perfect competition colored glasses" it naturally follows to disparage advertising. Given the fanciful assumptions of perfect competition--perfectly homogeneous products, perfect mobility of resources, perfect knowledge, and all firms so small that none can influence price--advertising ispurely wasteful. What valuable economic role could advertising play in such a world? All consumers know the attributes and availabilities of the products, products are equally readily (instantaneously) available in regard to location, and the prices for these products are all the same.
So much for advertising in a world of perfect competition. What about in reality? In reality, in the real world of actual competition--rivalrous attempts among firms to attract consumers--advertising does indeed play a useful, beneficial economic role. The three major points of contention regarding advertising are persuasion versus information, waste versus efficiency and concentration versus competition.
Persuasion versus Information
The claim that much of advertising is only persuasive rather than informative is based on such examples as "Coke is it!" The anti-advertiser claims that there is no information in such an advertising slogan, there is only hoopla in an attempt to persuade a poor consumer to part with his cash. It should be understood that just because advertising is of no value to a particular critic, someone else may find the advertising to be of value. For any one person most advertising is in fact not directed at him. Many of us will agree that the above slogan is lacking in information--what's the price?, where can it be bought?, what's the nutritional content?, etc. But for someone on their way home who has promised to pick up a six pack of Coke for the evening's company the slogan is in fact a welcomed reminder. People are busy with a multitude of activities and cannot keep everything in mind; reminders are often necessary.
I suspect everyone reading this page can cite an example wherein they had neglected the consumption of some favored product only to spot it or a simple advertising slogan again and think in effect: "Oh yes, I used to enjoy X, I'll have to buy it again!" People in such situations are glad to have had the reminder.
Further, newcomers need to be introduced to products which are familiar to the rest of us. Newcomers would include infants, immigrants and populations where the product is first being introduced. The reason the particular product in that slogan strikes us as needing no further advertising is because the company has done such a thorough job of constantly keeping the product before us that we perceive it as unnecessary.
The anti-advertisers have set up a false dichotomy between persuasion and information; the two are actually and necessarily intertwined. The only way to inform someone is to first persuade them to direct their attention to that information, thus the clever slogans, bright colors, catchy tunes, etc. And the only way to persuade someone is with information, however limited.
But, let's grant the anti-advertisers their point: consumers at times buy products only because of a purely persuasive advertisement. The very proper response to such a charge is: SO WHAT? If a consumer wants to buy a product purely based on the persuasion of an advertisement that's his right as a consumer to spend his money as he chooses. Besides, how many wants are inherent, beyond the persuasion from anyone? Very few purchases or human preferences are for inherent wants--and certainly being consumed with animosity toward advertising is not one of them!
Waste versus Efficiency
The second claim against advertising is that it increases production costs--undeniably producing a product and then spending money on advertising is more costly than spending nothing on advertising. But this is also true of every feature of any product--producing an automobile with an engine versus one without an engine, for example. The real issue is: are the extra costs (advertising, the auto engine, etc.) a value to the consumer he is willing to pay for? If not, generic-type non-advertised goods will out-compete flashy, heavily advertised goods; the consumer ultimately decides. Since heavily advertised products are in fact the norm, what is it that advertising provides that is of value to the consumer? Information as to the existence of the product, its special features, where it is available, etc. Anyone who doubts that the consumer values the information in advertising can just think of the last time he bought a newspaper to check movie schedules or perused the flyers in the Sunday newspaper searching for a purchase.
A different line of argument which claims advertising is wasteful is based on the notion that many products are the same except for the advertising--examples often cited are detergents, soft drinks, aspirin, etc.--and thus the advertising is an unnecessary extra cost. The truth is exactly the opposite, the more one knows and cares about the subtle differences between different brands the more obvious the differences are. What the advertising critic is really saying here is that the differences between, say Coke and Pepsi, are unknown to him and he really does not care about any such differences. This is the argument from snobbery or what Murray N. Rothbard has called "the sustained sneer." Imagine telling a major critic of advertising like John Galbraith that all economics books are the same, they all cover prices, costs, supply, demand and so on. The only one who could honestly believe such a statement is someone unfamiliar with and uninterested in economics--the way Galbraith is unfamiliar with and uninterested in the differences between Coke and Pepsi. Given the actual though subtle differences among products, advertising alerts consumers to the availability of products which may more closely match the consumers' preferences--a valuable service, indeed.
Concentration versus Competition
The last claim against advertising is that it encourages concentration in industries, that the high cost of advertising locks out newcomers who can't afford to compete with established heavy advertisers. Actually advertising--getting consumers' attention--makes it possible for the newcomer to attract consumers away from their established habits. Closing down all advertising would secure the position of the large, established firms.
Notice that new products, new malls, new restaurants, new gas stations are advertised heavily, and with the most glaring, loud and obtrusive means. Some examples: could Wendy's have ever broken through to successfully compete with McDonald's without advertising, could Diet Coke have succeeded without celebrity endorsements, could Wal-Mart have surpassed Sears in total sales if they could not have widely and repeatedly advertised their prices and very existence as an alternative? The lack of advertising (or the outlawing as has been done and is advocated by the critics) plays right into the hands of the dominant firms and products. Other than the anti-advertising theorists these are the biggest champions for ending advertising. Legal services, eyeglass, and vitamin advertising have all been outlawed at various times at the behest of the sellers of these goods and services. What freedom of advertising does is allow the consumer to shop for low prices in advance of entering these places of business; without advertising the consumer must go "blindly" in search of the best deals.
The desire to shut out newcomers' ability to reach potential consumers is a broader sociological law with widespread application. Examples: Incumbent candidates rarely willingly debate their newcomer challengers, established authorities ignore the arguments of their lesser-known critics, old money elites have no regard for the nouveau-riche.
Finally, the coup de grace in this entire argument: Anti-advertisers .... advertise! Yes, in trying to convince others of the evils they see in advertising they do all of the very things they condemn: They use clever phrases and examples to persuade others, incur costs in the creation of new arguments with subtle distinctions, and attempt to break through to reach followers who may be content with their existing understanding of the value of advertising.
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