Chapter 3 Economic and Regulatory Aspects of Advertising

Self-Interest (Free-Market Assumption)

People and firms pursue self-interest; buyers meet needs and firms lower prices to earn profit.

Complete Information (Free-Market Assumption)

Buyers make better decisions when they have abundant product information, aided by advertising.

Many Buyers and Sellers (Free-Market Assumption)

If one firm fails to meet needs, another produces a better product, ensuring consumer choice.

Absence of Externalities (Free-Market Assumption)

The free-market assumption that social costs (externalities) are minimized or accounted for.

Billiards Model

1% of money spent in economy is on advertising

First group advertising impacts is media, then customers, orgs, and stakeholders

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Advertising's Effect on Product Value

Gives products added value by increasing awareness, creating positive images, and implying quality.

Advertising's Effect on Prices

Ad costs pass to consumers, but mass production lowers unit costs, keeping cost impacts small.

Advertising's Effect on Competition

Can inhibit new large competitors, but enables small firms to compete regionally and drives innovation.

Advertising's Effect on Demand

Encourages primary and selective demand and acts as a stabilizing force during business cycles.

primary demand

demand for a product category

selective demand

demand for a specific brand

Advertising's Effect on Consumer Choice

New and improved brands dominate, Expands choice

Short-Term Social Criticisms

Focuses on specific ad styles, deceptive practices, or immediate harm caused at a point in time.

Puffery

Exaggerated, subjective claims that cannot be proven true or false; legal because they aren't taken literally.

Long-Term Macro Social Criticisms

Focuses on broad social/environmental impacts over time, such as promoting materialism, manipulation, and stereotyping.

Levels of Government Regulation

Advertising is regulated across national, state, and local or municipal levels.

Federal Agencies

FTC: Deceptive, unfair, comparative ads

FDA: Nutritional Labeling & Education Act (NLEA)

FCC: Broadcast media licensing

Patent & Trademark Office: Intellectual Property

Federal Trade Commission (FTC) Role

Regulates product advertising to ensure complete information, maintain sellers, and minimize externalities.

Five FTC Concerns

Deception, comparisons, endorsements, demonstrations, and bait and switch.

Deception

Mislead reasonable consumer

Endorsement

Must be honest opinion, if paid must be disclosed, if results atypical, must state general results

Bait and Switch

advertising and giving something else or at different price or nothing at all

FTC Remedy: Consent Decree

A document signed by an advertiser agreeing to stop a disputed advertising practice.

FTC Remedy: Cease-and-Desist Order

An official order prohibiting the further use of a deceptive advertisement.

FTC Remedy: Corrective Advertising

A requirement to run new ads that correct previous deceptive statements.

Food and Drug Administration (FDA) Role

Ensures truthful labeling for safe food, medicine, cosmetics, and regulates health claims.