Advertising in a Free Society (Critical)
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Advertising in a Free Society (Critical)
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Product Details
| ISBN-13: | 9780255366687 |
|---|---|
| Publisher: | London Publishing Partnership |
| Publication date: | 09/16/2014 |
| Series: | Hobart Papers |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 206 |
| File size: | 522 KB |
About the Author
Arthur Seldon was the Editorial Director at the Institute of Economic Affairs from the late 1950s until the later 1980s. At the IEA, he directed a publishing programme that included some of the world’s most eminent economists, including FA Hayek and Milton Friedman. Arthur Seldon was a prolific author and one of the most influential economists of the late twentieth century.
Christopher Snowdon is Director of Lifestyle Economics at the Institute of Economic Affairs and an independent writer and researcher. He is the author of The Art of Suppression (2011), The Spirit Level Delusion (2010) and Velvet Glove, Iron Fist (2009). His work focuses on pleasure, prohibition and dodgy statistics. His blog is Velvet Glove, Iron Fist.
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Advertising in a Free Society
By Ralph Harris, Arthur Seldon
The Institute of Economic Affairs
Copyright © 2014 The Institute of Economic AffairsAll rights reserved.
ISBN: 978-0-255-36667-0
CHAPTER 1
BACKGROUND
Written by Ralph Harris and Arthur Seldon, Advertising in a Free Society was first published in 1959, two years after Vance Packard's best-selling exposé of motivational research in advertising, The Hidden Persuaders, and one year after J. K. Galbraith portrayed advertising as the driver of needless consumption in The Affluent Society. In Britain, rationing had finally come to an end five years earlier and it was two years since Harold Macmillan had announced that 'most of our people have never had it so good'. The first television commercial (for 'tingling fresh' toothpaste) had been broadcast just four years earlier, on 2 September 1955. In the US, the advertising industry was firmly in its Mad Men era, the first series of which is set in 1960, but even the marketing executives of Madison Avenue and Soho, so skilled at putting their clients' products in the best light, seemed unable to lift the reputation of their own industry.
Advertising was widely seen as trivial, repetitive and dishonest. It was disparaged by conservatives for being economically wasteful and despised by many socialists for being the garish face of capitalism. It was rarely defended, except – grudgingly – as a necessary evil that helped subsidise the media. Today, as in 1959, advertising continues to attract what Harris and Seldon described as 'many weighty criticisms'. For those who view it as capitalist propaganda, advertising bears the brunt of attacks that might more openly be made against the free market. For those who object to consumerism, marketing is held responsible for manipulating the public into buying products they neither want nor need. For those who reject the concept of consumer sovereignty, advertisers 'use every possible trick and tactic to catch us hapless flies in their profit-driven webs' (Hastings 2013: 151).
In Advertising in a Free Society, Harris and Seldon undertook a thorough review of what was then a subject largely ignored by economists. Empirical research into the economic effects of advertising was in its infancy and the authors lamented in the preface that there were 'not many economist writers on advertising whom we found directly helpful'. Since advertising was considered a rather grubby part of the economic landscape, what little academic attention it received tended to come from critics. Harris and Seldon divided advertising's opponents into the 'classical critics', such as the renowned economist Alfred Marshall, and the 'left-wing critics', notably Nicholas Kaldor, whose 1950 study The Economics of Advertising continues to be widely cited in the academic literature today. They also addressed the social critics, notably John Kenneth Galbraith, whose then recently published book The Affluent Society had been an instant commercial success.
Looking back, it is remarkable how little the arguments against advertising have changed. Empirical research has taken the wind out of many of the economic objections, but aside from a greater focus on the alleged environmental impact of mass consumption, the social criticisms remain much the same (and, as Harris and Seldon point out, they were far from new even in the 1950s).
In addition to reviewing the economic literature, Harris and Seldon carried out detailed research into the marketing plans of many British industries from banking and brewing to hair perms and pet food. Despite a number of criticisms and caveats, they concluded that advertising was not a necessary evil but a necessary good that was beneficial to both the consumer and the producer. It greased the wheels of capitalism, opened the eyes of consumers and led to greater efficiency in markets. Contrary to the classical and left-wing critics, Harris and Seldon argued that advertising 'has helped to keep markets competitive, tumbled oligopolists and monopolists, kept prices down, and in the long run made the economic system bow to the consumer's will'. If, as some critics complained, advertising created new desires, that was to be celebrated, not condemned.
In this introduction, we shall examine how well Harris and Seldon's arguments stand up half a century later.
CHAPTER 2THE ECONOMIC EVIDENCE
Economic evidence: the consumer
In the decades since Advertising in a Free Society was first published, a large amount of empirical evidence has been produced that generally, albeit sometimes tentatively, supports Harris and Seldon's view of advertising as being economically beneficial. The key economic questions raised by the classical and left-wing critics were whether advertising raised prices, created barriers to entry or was an inefficient use of a firm's money. Left-wing critics were particularly concerned that advertising allowed companies to benefit from the mass market without passing on the savings to the consumer. Classical critics, on the other hand, were concerned that branding and marketing made demand less elastic and therefore made competition more imperfect. Both sets of critics feared that 'combative' advertising, in which companies battle for a share of a static market, was economically wasteful and therefore likely to lead to higher prices.
Academic discussions of advertising have traditionally made a distinction between the 'informative' and the 'persuasive'. Informative advertising of the sort that might be seen in a newspaper's small ads was generally considered useful while persuasive advertising, which dwelt on minor differences between brands and sought to sell a product by selling a lifestyle, was considered inefficient and unnecessary. Few denied that consumers benefited from being made aware of a product's existence, but since the essential information in an advert extends little further than the price, specification and location of the vendor, there was a residual prejudice against the supposedly 'wasteful' advertising which hammered home the same old brands.
This argument is still made today, but it received short shrift from Harris and Seldon, who argued that it is impossible to draw a distinction between 'informative advertising' and 'persuasive advertising' in practice. No matter how much information an advertisement contains, its purpose is to persuade (Harris and Seldon noted that 'even a rail-way timetable is meant to encourage travelling by train'). Conversely, a 'persuasive' advertisement contains information, even if it is only the name of the brand or the price of the product. The simplest advertisements for well-known brands remind consumers of the product's existence and make them recall information that they have received in previous advertisements, reviews, personal recommendations or past experience.
Schmalensee (2008) summarises the critics' position as follows: 'Buyers are assumed to respond rationally to informative advertisements, while persuasive advertisements are somehow manipulative.' However, he concludes that 'this distinction is of little value empirically: few if any advertisements present facts in a neutral fashion with no attempt to persuade, and even those with no obvious factual content signal to consumers that the seller has invested money to get their attention.' There is no denying that many advertisements lean more heavily on gimmicks, jingles and humour than on hard facts, but this is necessary if the message is to be remembered. Information is no use if it goes unnoticed or is forgotten (Kirzner 1971).
With regards to pricing, there is very little evidence to suggest that advertising raises the cost of products and much to suggest that lower prices are typical. None of the studies which examine places that forbid advertising for certain products find lower prices than in places where advertising is allowed (Benham 1972; Cady 1976; Kwoka 1984; Milyo and Waldfogel 1999; Clark 2007). On the contrary, prices in jurisdictions where advertising is allowed tend to be lower. Moreover, it is usually the case that 'prices of advertised products are lower than those not advertised' (Schmalensee 2008). Love and Stephen's review of the literature on the self-regulating professions found that advertising is associated with lower fees (Love and Stephen 1996) and, in a thorough review of the literature, Kyle Bagwell (2007: 51) found 'substantial evidence that retail advertising leads to lower prices' in many industries as well as 'some evidence' that manufacturer advertising also leads to lower prices.
Economic evidence: the producer
The question of whether advertising is efficient is partly answered by its tendency to make prices lower. The cost of advertising can be recouped with an appropriate return from the greater sales that come from economies of scale and selling over a wider area to a larger customer base. Businesses must believe that advertising is a more efficient way of selling than, for example, employing travelling salesmen or else they would not advertise. They would be victims of an enormous global information failure if they were wrong in this belief. If companies prefer to use advertising, rather than telesales teams or discount coupons, it is a good indication that advertising is more effective and efficient.
But advertising does not necessarily have to lead to more sales for it to be efficient. It merely needs to be cheaper than the alternative. Critics who count advertising spend, which typically represents 1–2 per cent of GDP, as wasteful expenditure appear to forget that companies would need to find other ways to sell in the absence of advertising. Their criticisms of advertisers resemble the old complaints about 'middlemen', such as investors and wholesalers, who have historically been portrayed as parasites who take profit without adding value. But as Harris and Seldon note, the retailer, wholesaler, salesman and advertiser are as integral to commerce as the craftsman and the labourer. Selling is a legitimate cost of doing business and it would be wrong to exclude advertising from a firm's expenses when calculating taxable profits or to tax it, as some socialist writers have suggested (Korten 2001: 269; Murphy 2011: 287).
Advertising would not survive for long if it consistently led to lower profits and so it is no surprise to find that economic studies have shown a strong tendency towards greater profitability, particularly in the case of products that are purchased frequently ('convenience goods') (Comanor and Wilson 1967, 1974; Weiss 1969). However, this is not always the case and some studies have observed the opposite effect (Bloch 1974; Ayanian 1975). The much-quoted analysis, usually attributed to Lord Leverhulme, that 'half of every advertising appropriation is wasted, but nobody knows which half' may explain why the empirical evidence is mixed. Some advertising campaigns are duds and some products are in irreversible decline regardless of the quality of their advertising.
It seems likely, therefore, that there are some markets in which advertising reduces company profits, especially if companies are locked in a prisoner's dilemma in which they feel forced to advertise because their competitors are advertising (Frank 1999: 155–56; Qi 2013). For Harris and Seldon, this was just too bad. Capitalism exists to serve the buyer, not the seller. If advertising increases profits then so much the better, but the real question is whether it lowers prices and spreads information. Generally speaking, it does. Furthermore, it benefits consumers by saving time and reducing search costs. As Harris and Seldon point out, there are times when 'the consumer may not wish to be bothered with the business of acquiring more information'. Consumers might be prepared to spend time researching a product when it involves major expenditure, but they are 'prepared to leave the choice of their bootlaces or bath-powder to agents: retailers whose advice and judgement they have learned to respect, or manufacturers whose brands they have learned to trust'.
And why not? Bagwell (2007: 41) argues that consumers are less responsive to advertising when products are of higher price and bought less frequently because they are prepared to 'incur meaningful search costs in order to obtain better information'. But when it comes to convenience goods, consumers have little to lose by trying a product on the basis of an advertisement. Trusted brands are, say Harris and Seldon, 'the consumers' guarantee'. The existence of costly advertising gives the customer an assurance – rarely unjustified – that the product's manufacturers 'are not will-o-the-wisps, barrow-boys who are here today and gone tomorrow.' The time-saving benefits advertising provide to the consumer by helping him separate the wheat from the chaff are an important, though largely overlooked, aspect of advertising.
CHAPTER 3DOES ADVERTISING CREATE MONOPOLIES?
Advertising and market power
The combination of lower prices and higher profits appears to create an incongruous win–win situation. Is advertising such a panacea that it enables consumers to buy at lower prices while helping companies to make larger profits? To answer this, we must ask what happens when advertising works (which, it must be restated, is not always).
Advertising creates economies of scale by extending a company's reach across the country and beyond. It facilitates direct selling to the consumer by mail order or over the Internet, thereby cutting costs. It helps the most efficient companies to thrive at the expense of the more wasteful. It allows innovative products to appear on the shelves in lightning quick time. In short, it makes a low-cost mass market possible. These efficiencies enable companies to lower prices, but it cannot be denied that the arrival of large corporations selling global brands often comes at the expense of some small, local companies which do not or cannot compete at the same level. It is therefore plausible that advertising wipes out competition and could ultimately lead to monopoly.
The fear of incumbent firms using advertising to keep out competitors was a concern for classical critics such as Alfred Marshall and Arthur Pigou. On the other hand, advertising might afford new entrants the tools they need to break into the market. The empirical evidence has produced mixed results with regards to whether advertising facilitates or deters new entrants in the market, but it seems to make markets more competitive most of the time (Bagwell 2007: 45–47).
Incumbent businesses sometimes increase their advertising spend in response to the arrival of a newcomer (Thomas 1999; Alemson 1970) and Harris and Seldon believed that advertising could indeed be used by 'dominant retailers' to keep out competitors. However, even if this were the case, they did not believe that all competitors could be kept out. Advertising might lead to an oligopoly of large firms dominating the market, but critics were wrong to assume that 'oligopoly is one degree removed from monopoly.' So long as the oligopoly remains competitive and does not turn into a cartel, the consumer would not suffer. Each company would continue to compete fiercely on price and quality to the consumer's benefit. There are a limited number of supermarket chains in the UK, for instance, but few would argue that there is no competition, let alone that the supermarket oligopoly is a virtual monopoly that keeps prices high. Harris and Seldon made the comparison with democracy, noting that the [then] 'British "two-party" system is not merely one degree removed from totalitarianism; it is democracy in action.'
The tendency towards lower prices mentioned above strongly suggests that market concentration driven by advertising creates neither cartels nor monopolies. This can be illustrated by a fact Harris and Seldon mention, almost in passing, in Appendix A. They note that the four largest makers of detergent accounted for 28 per cent of sales in 1948, but this had risen to 97 per cent just eight years later. This dramatic change in market concentration is not unusual for a new product category (as washing powder was in the 1940s). It can be compared with the market concentration of Internet search engines at the turn of the millennium or the appearance of an oligopoly in cigarette companies in the early twentieth century. It is common for the number of producers to be whittled down in the early days of a new market as the least efficient firms exit or are taken over. Advertising can play a role in this, but – and this is Harris and Seldon's main point – it does not lead to monopoly. The market for washing detergents remains fiercely competitive in Britain half a century later and the same cigarette companies continue to fight for market share globally. Even Google, with its two-thirds share of the world's search engine traffic, cannot afford to be complacent. No matter how many users a free-to-consumer website has, it never has a monopoly, let alone an unshakeable monopoly, so long as rival services exist, or can come into being. The 2007 Guardian article 'Will Myspace ever lose its monopoly?' stands as a warning to those who mistake temporary market share for enduring power (Keegan 2007). So long as the market is contestable, there is competitive pressure to keep prices down, even if there are only one or two 'dominant retailers' (Armentano 1999).
(Continues...)
Excerpted from Advertising in a Free Society by Ralph Harris, Arthur Seldon. Copyright © 2014 The Institute of Economic Affairs. Excerpted by permission of The Institute of Economic Affairs.
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Table of Contents
Contents
The author, ix,Foreword, x,
Summary, xiii,
Part 1 Introduction to Advertising in a Free Society Christopher Snowdon, 1,
1 Background, 3,
2 The economic evidence, 6,
3 Does advertising create monopolies?, 12,
4 Brand loyalty, added value and manipulation, 18,
5 Does nanny know best?, 30,
References, 51,
Part 2 Advertising in a Free Society: The Condensed Version Ralph Harris and Arthur Seldon, 57,
Introduction, 69,
1 The need for advertising, 71,
2 The critics, 91,
3 The claims, 114,
4 Sovereign or puppet?, 135,
Appendix A: The detergent halo, 157,
Appendix B: 'Hidden persuasion', 166,
Appendix C: Political advertising, 170,
Appendix D: A subsidised press?, 176,
Appendix E: Restrictive practices in printing and their effects on advertising costs, 178,
Appendix F: The battle for commercial television – who was right?, 182,
References, 184,
About the IEA, 188,