Why is advertising economically wasteful

A consumer who pays a high price for a brand-name product is paying for the assurance of increased quality. When a company performs poorly, the brand-name, market-enforced sanction it faces is usually much greater than any court-enforced legal sanction it might face.

Consider, for example, the case of defective Firestone tires on Ford Explorer sport-utility vehicles in Although these direct costs clearly were substantial, they were dwarfed by the brand-name market costs borne by Bridgestone and Ford, which were between some nine and seventeen times as large. Similar market effects occurred in when E. Although Jack-in-the-Box reacted quickly to the food poisoning and took actions to prevent its recurrence, its stock-market value fell by more than 30 percent when this information was disclosed, or more than double the direct litigation and recall costs.

While the government regulates the quality of products, the regulatory cost that can be imposed on companies is generally a small fraction of the economic cost that the market imposes on poorperforming companies with established brand names.

If those companies had lacked brand names, the economic punishment they suffered would have been much smaller. Because brand-name companies have a greater incentive to ensure high quality, consumers who buy brand-name products are necessarily paying for something: the added assurance that the company has taken the necessary measures to protect its reputation for quality. Consumers are not ignorant or irrational when they buy an advertised brand-name aspirin rather than a non-brand-name product at a lower price.

But more important, the products differ economically. The brand-name aspirin supplier, therefore, has a greater economic incentive to take added precautions in producing the product. Similar economic forces are at work when multiple generic drug companies produce the same drug. Because pharmacies generally have an incentive to purchase the lowest-cost generic variant, each generic company has the incentive to lower costs, including reducing its quality-control efforts, subject only to imperfect FDA audits.

When companies do not earn a large price premium on their products, the potential sanction the companies face for poor quality control is much lower than the economic cost borne by brand-name companies.

Seen in this light, the question is not whether consumers are ignorant or irrational when they pay a higher price for a brand-name product, but whether they are paying too much for the additional quality assurance brand names necessarily provide.

Each promotional message refers us to a commodity which is itself the site of another promotion. And so on, in an endless dance whose only point is to circulate the circulation of something else. We are oftentimes unconscious of how much we keep on buying things because of what we see on the television, hear from the radio, read on magazines or newspapers or what we are exposed to on the internet or billboards. Advertising seeps even into our unconscious and affects us in ways that we are not even aware of.

And it is an enabler of consumerism, urging people to continue the purchase of products or services and the attainment of yet more material things. This has led to uncontrolled desires, more wastes and a big impact on the environment. The important question to ask now is if it is at all possible to move away from this materialistic economy that advertising has produced?

The quick answer is and should be a resounding YES. But how do we start? In the past, many professionals such as doctors, lawyers, and pharmacists succeeded in getting state legislatures to implement complete or partial bans on advertising in their professions, preventing either all advertising or advertising of prices.

In recent decades court decisions have overturned these restrictions. At the federal level, the U. It can issue cease-and-desist orders, require corrective advertising, and mandate disclosure of certain information in ads.

The Regulation of cigarette advertising has been particularly controversial. The Federal Trade Commission has required cigarette manufacturers to disclose tar and nicotine content since , although it had prohibited precisely the same disclosure before that.

Beginning January 1, , the federal government also banned all radio and television advertising of cigarettes. While overall cigarette advertising expenditures dropped by more than 20 percent, per capita cigarette consumption remained unchanged for many years.

Critics of the regulations maintain that it was the growing evidence of the harmful effects of smoking, rather than the reduction in advertising, that ultimately led to the smaller percentage of smokers in society. The critics also contend that the advertising ban may have slowed the rate at which low-tar cigarettes were used.

Governments have funded or mandated advertising to reduce harmful behaviors such as smoking, drunk driving, and drug use. Researchers have not devoted much attention to such efforts. The one study that looked at this measure found that increased expenditures on antismoking measures were associated with declines in per capita cigarette sales.

He was previously an economist with the Federal Trade Commission. Concise Encyclopedia of Economics. Rory Sutherland in Alchemy. EconTalk, November Advertising By George Bittlingmayer. Categories: Government Policy The Marketplace. Further Reading Becker, Gary S. Benham, Lee. Chaloupka, Frank J. Comanor, William S. Ekelund, Robert B.

Advertising and the Market Process. Landes, Elisabeth M. Rubin, Paul. London: Blackwell, Schmalensee, Richard. The Economics of Advertising.