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Advertising’s Economic Impact & The Regulation of Advertising
| Date post: | 21-Oct-2014 |
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Education |
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Advertising’s Economic Impact & The Regulation of Advertising
Name that Brand…
What brand comes to mind first?
• Toothpaste
• Laundry detergent
• Shampoo
• Paper towels
• Toilet paper
• Deodorant
Name that Brand…
What brand comes to mind first?
• Cereal
• Soup
• Fast food
• Pizza
• Soft drink
Name that Brand…
What brand comes to mind first?
• Car insurance
• Jeans
• Tennis shoes
• Pain reliever
• Cell phone
• Bank
Per Capita Ad SpendingGross Domestic Product (GDP) = the total market value of goods and services produced by workers and capital within a nation's borders1
1 Source: Princeton Univ, http://wordnetweb.princeton.edu
Today’s Objectives
Discuss the impact of advertising on the economy
Describe how government agencies regulate advertising to protect both consumers and competitors
Discuss the activities of nongovernment organizations in fighting fraudulent and deceptive advertising
Economic Impact
Self-interestComplete
information
Absence ofexternalities
Many buyers& sellers
Free-Market Principles
Economic Impact at a Glance
Four Key AreasAdvertising can impact the economy in 4 key areas:
• Product values
• Prices & competition
• Consumer demand
• Consumer choice
Product Values
Advertising adds value.
In the minds of consumers, a recognized (through advertising) brand has added value.
Consumers will pay more for a known brand, even when its unknown competition is functionally identical.
Advertising impacts a product’s image. Do you think it can also impact the consumer’s image of him/herself? It can appeal to our self interest.
Do the brands we buy send a message about who we are?•Clothes•Shoes•Cars•Hairstyles•Cell phone
Product ValueRank these women’s jeans from least expensive to most expensive.
BA C
Product Value
Gucci, $585Lucky, $90 Levi’s, $20A B C
Answer: B, A, C
Source: luckybrand.com Source: walmart.com
Source: Gucci.com
Pricing
Would less advertising = lower prices?
Advertising can decrease or increase the price of goods, but it generally decreases the prices consumers pay, because there are many buyers and sellers.
DECREASE
• Mass production lowers unit costs, selling price
• In retail, consumer focus on price drives prices down through competition
INCREASE
• The cost of advertising affects the manufacturer’s expenses
• Manufacturers use advertising to stress desirable brand features, increase cost
= 1 cent on advertising
Photo c/o Coca-Cola Company
Competition
Can only the biggest companies compete?• Competition tends to reduce the number of businesses in an industry (the
strong and/or smart survive)
• Small, regional businesses can compete with larger corporations on a local level with a sound marketing plan
Consumer DemandYou have to have it, because…Does advertising generate consumer demand? Or does it simply respond to it?
Source: apple.com
Consumer DemandPrimary vs. Secondary DemandAdvertising can drive sales of an entire product class or of a brand.
Source: inventorspot.com Source: organicvalley.com
Primary Demand: Grow demand for industry, product class
Secondary Demand: Grow demand for a specific brand
Consumer Demand’s Impact
• Consumer demand increases the total market, i.e. the size of the pie
GROWING MARKET
Mobile phones
• Advertisers compete for shares of growth
• Brands may increase• Prices may decrease
Consumer Demand’s Impact
STATIC MARKET
Pharmaceuticals
• Consumer demand keeps the market at same overall value, i.e. the pie doesn’t grow or shrink
• Advertisers compete for each other’s shares
• Brands may decrease• Prices decrease
Consumer Demand’s Impact
DECLINING MARKET
Watches
• Consumer demand shrinks the market, i.e. the pie becomes a tart
• The market may segment itself (luxury)
• Advertisers compete for each other’s shares to maintain revenue
• Brands may decrease• Prices may increase
Consumer ChoiceThe Importance of Product DifferentiationIn a free market where consumers have a multitude of choices within a product class, advertisers must demonstrate to consumers what makes their product different.
Doing so appeals to our need for complete information and an absence of externalities.
You want an SUV, eh? Which one?
All car photos from www.automotive.com
Ford Escape Hybrid
Nissan Juke Cadillac Escalade
The Abundance Principle
Self-interestComplete
information
Absence ofexternalities
Many buyers& sellers
Allows more effective competition
Stimulates competition
Keeps consumers informed of alternatives
Self-regulates to keep
market free & open
In an economy that produces more goods & services than can be consumed, advertising:
Broadcast media licensing
Examples: programming times and stations for ED drugs , Janet Jackson’s “wardrobe malfunction”
FCCFederal Communications Commission
Deceptive, unfair, & comparative ads
Example:
Activia claim to improve digestion http://www.youtube.com/watch?v=9j9nRJgX5iQ
FTCFederal Trade Commission
Definitions and labeling of consumer packaged goods and drugs
Examples: pharma side effects, Yaz retraction
http://www.youtube.com/watch?v=EO-G8O0lHq0
FDAFood & Drug Administration
Intellectual property
Examples: Coca-Cola logo, contour bottle design, secret formula.
Patent & Trademark Office
Copyrights “works of authorship”
Example: GEICO advertising campaigns
Library of Congress
Federal Regulation AgenciesThese are the federal departments and agencies that regulate advertising and their areas of responsibility:
FDA Disclosure
This ad for Revolution, a topical parasiticide for dogs and cats, has a long disclosure
State & Local Regulation
Different states have different regulations governing advertising
Local government regulation: city & county consumer protection agencies
National marketers comply with states’ laws
E.g. NC law requires businesses to get a permit before advertising an “out of business” sale
Nongovernment Regulation
Better Business Bureau (BBB)
National Advertising Review Council (NARC)o National Advertising Division (NAD)o National Advertising Review Board (NARB)
Regulation by the media
Regulation by consumer groups
Self-Regulation:Agencies & Associations
Research and verify claims &comparative data before use
Liable for misleading or fraudulent claimsAgency Responsibilities
Some maintain in-house legal counsel
American Association ofAdvertising Agencies (AAAA)
Industry-WideAssociations American Advertising Federation (AAF)
Association of National Advertisers (ANA)
Self-Regulation: AAF Principles
International Advertising• Foreign governments often regulate advertising more strictly than in
the United States– Some governments ban specific products– Many countries prohibit puffery– Many European countries ban coupons,
premiums and free tie-ins– Across Europe, paid product placements
in television programs are typically prohibited
Examples from France: 1) Alcoholic beverage companies are banned from sponsoring sporting
events, prohibited from advertising on TV, and alcohol advertisements are very restricted in other media.
2) All words in advertisements must be in French, even if the word or phrase is more common in another language.
Sources: 1) FTC, www.ftc.org2) International Business Law and Its Environment, R. Schaffer, F. Agusti & B. Earle, 2008
Current U.S. Regulatory Issues
Tobacco Controversy
Consumer Privacy
Supreme Court: “speech” or “commercial speech”
Advertising to Children
Current U.S. Regulatory Issues
Supreme Court: “speech” or “commercial speech”
Does the First Amendment protect advertising?
The Supreme Court first ruled in 1976 that advertisements enjoy protection under the First Amendment.
(Case: Virginia State Board of Pharmacy v. Virginia Citizens Commercial Council)
They issued a 4-part test in 1980 to determine whether commercial speech can be regulated: •Does the commercial speech concern a lawful activity?•Does restriction serve the government interest?•Does regulation advance the government interest?•Is the restriction no more than necessary to further the interest?
(Case: Central Hudson Gas v. Public Service Commission)
In 1993, they determined that the distribution of advertising is as protected as distributing newspapers.
Current U.S. Regulatory Issues
Tobacco Controversy
About that First Amendment Protection…
The harm created by smoking is a significant externality, or social cost.
In 1998, states’ attorney general reached a settlement with the tobacco industry that mandated significant reform of tobacco marketing.•No advertising to children•No outdoor advertising•No sponsorships at events with youth oriented audience•No cartoon characters in advertising
Lucky Strikes cartoon ad, 1955: http://www.classictvads.com/classicindex.shtml
Goodbye, Joe!
Santa had to quit, too!
Current U.S. Regulatory Issues
Advertising to Children
Come on…
No one would ever advertise inappropriately to / with children!
Would they?
Current U.S. Regulatory Issues
Advertising to Children
Kids are not sophisticated consumers and can’t be treated as such.
The Council of Better Business Bureaus established the Children’s Advertising Review Unit (CARU). CARU reviews and evaluates advertising directed at children.
CARU seeks voluntary cooperation from advertisers in advertising to children under age 12 (page 41 of text).
M&M’s commercial, 1980s:http://www.youtube.com/watch?v=gBZoTxUMPZI
M&M’s commercial, today:http://www.youtube.com/watch?v=YEiFIKBPUq8
Current U.S. Regulatory Issues
Consumer Privacy
Is your personal information private?
A person’s likeness cannot be used in a commercial without their permission.
Today’s controversies are primarily in the digital world:•What gets shared on Facebook•The ability of companies to track behavior online•SPAM emails
For now, the only regulation is self regulation.
