Antitrust Monopolization

Advertising Apologies

Samuel Cook defends advertising on the grounds that it: funds; drives culture; creates competition; and influences, rather than manipulates. I have argued at length against each of these apologies for advertising.

Funding. Yes, advertising does fund newspapers, online search, social media, and many other useful services. But there are better ways to fund services we love, such as charging full price for those services, or voting for government subsidization.

Why are those better funding methods? Because they are less economically wasteful. Funding through advertising involves two kinds of waste.

First, the money that advertisers are willing to pay for advertising represents waste, in the form of profits generated from inducing consumers to pay higher prices for products that those consumers do not actually prefer. In the information age, you don’t advertise to inform, but rather to manipulate (or as Cook would have it, to influence, of which more below), and you should never invest more in manipulation than you can hope to recover from being able to charge higher prices for lower quality products as a result of your promotional efforts. But those higher prices and reduce product quality represent waste — an advertising-induced misallocation of consumer resources. Consumers would be better off paying less for unadvertised products.

The second source of waste from funding through advertising is the expenditure of resources on advertising infrastructure itself. Given that advertising serves only to distort consumer choices, all the money required to actually create advertisements and target them at consumers itself represent a waste — a diversion of productive resources away from more socially valuable uses. Other funding models, such as subscriptions or tax-and-transfer, do not waste resources in these ways.

Suppose, for example, that a newspaper funds itself by selling $1 million worth of advertising. Advertisers would never be willing to spend $1 million on advertising unless they could earn a profit on that investment — through the higher prices for lower quality made possible by the advertising. If the advertisers hope to make a market rate of return on their investment of 8%, then we can infer that consumers lost $1.08 million to advertisers by buying higher-priced, lower-quality advertised products as a result of the advertising sold by the newspaper. To keep things simple, let’s assume that the newspaper offers production as part of its advertising service, so that creation of messages, images, and so on is all included in the $1 million the newspaper charge for advertising. If all these production services cost the newspaper $100,000 to provide, then the newspaper will net $900,000 from its advertising sales that it can spend on news gathering. The net result is that, to fund journalism to the tune of $900,000 using advertising, a total of $1.08 million must be wasted by consumers, and another $100,000 wasted by newspapers, which translates into a total loss to society of $1.18 million.

By contrast, if the newspaper were simply to charge full price to readers, and readers to pay it, then nothing would be wasted in the funding of journalism. Consumers would pay $900,000 for $900,000 worth of newsgathering (or perhaps a little less, to account for the costs of administering a subscription service). Granted, news is a public good for which consumers may not be willing to pay, even if they love it. In that case, the most efficient way to fund newspapers would be through government subsidy. Government would tax those $900,000 from consumers and pay them out to newspapers (less the cost of administering the tax system), again with none of the waste associated with advertising as a funding mechanism.

Would government subsidy be a threat to democracy? Well, it wasn’t for the first hundred years of American democracy, when the federal government heavily subsidized the news by letting newspapers mail paper virtually for free to subscribers through the U.S. Mail, making the American newspaper industry into the envy of the world.

Drives culture. Cook’s argument here is that firms use advertising to convey messages of public importance: “Nike has, for years been on the frontline of effecting social change,” he writes. This is really a variant of the argument that advertising funds socially useful services — here the socially useful service is public messages that promote certain social values. The trouble with this apology for advertising is here again that advertising is a wasteful funding method. Ban commercial advertising, raise taxes by the $3.34 billion that Nike will spent last year on advertising, and then earmark that money for distribution to activist organizations for use in public service advertising campaigns. You would end up with a more powerful public service message, because  Nike’s public service message is weakened by the fact that it’s tied to selling shoes, and consumers would end up better off because many would not be influenced into buying sneakers they don’t need as collateral financial damage associated with Nike’s public service advertising.

Looking beyond this economic argument, it is important to acknowledge here too the many rich critiques of advertising’s influence on culture. Some argue that advertising destroys culture by encouraging people to derive pleasure from consumption. Others argue that it simply crowds out messages that are not tied to commercial ends. Talented young artists simply can’t afford to put up billboards celebrating love, or run Super Bowl commercials celebrating social harmony,  for example, because deep-pocketed advertisers can outbid them for that advertising space every time. Ban commercial advertising, and political advertising — something that I most certainly do not condemn — becomes far less expensive and more common. That’s good for culture and for democracy. The heart of my argument against commercial advertising is not, however, cultural, but economic.

Creates competition. Advertising certainly can create competition, by helping a startup, for example, challenge an entrenched brand. But advertising promotes competition in a way that deprives competition of the virtues we usually ascribe to it. The startup that advertises wins by influencing consumers, not by fielding a better product. When firms advertise to compete, they compete on advertising — which company has the more powerful influence campaign — and not exclusively on the variables that healthy competition is supposed to influence — price and quality.

In a world without advertising, startups have only one way to challenge the incumbent — by offering a better quality product at a lower price. That limitation ensures that competition will tend to minimize price and maximize quality. When firms compete on influence — via advertising — there is no guarantee that the firm that wins will offer the best product at the lowest price; the winner may win instead by advertising best. So while advertising may promote competition, it undermines healthy competition.

True, sometimes a brand is so entrenched that startups cannot enter the market without the aid of advertising, no matter how good their products and how low their prices. But the only solution to this problem that leads to health competition — competition that’s focused on price and quality — is to ban advertising and to use the antitrust laws to break up entrenched brands. Banning advertising itself undermines entrenched brands, because owners of those brands often use advertising to maintain their power. Action under the antitrust laws to compel licensing of iconic trademarks and other intellectual property would undermine brands that are entrenched for reasons other than advertising, such as advantages associated with being first to market. It has been done before.

Influences, not manipulates. Cook takes issue with my characterization of advertising as “manipulative,” arguing that manipulation implies deceit. Good advertising, argues Cook, does not deceive, but rather “shar[es] passion” for a product in a truthful and honest way, “influencing,” rather than manipulating.

Certainly, much advertising influences without deceiving, and any case against advertising must explain what is wrong with such influencing. What is wrong is that truthful, non-misleading advertising can influence consumers into purchasing products that they do not really prefer. Current law regarding advertising, as well as Mr. Cook, assume that the only advertising that can cause consumers to buy products they do not really prefer is deceptive or misleading advertising, which is why the law prohibits misleading or deceptive messaging. But for several decades now, behavioral economists have been quite clear that truthful and non-misleading advertising can also induce consumers to buy products they do not really prefer, by operating on the habit-forming parts of the brain, to the exclusion of the deliberative parts of the brain. Just as countless tourists have died in London by looking — out of habit — in the wrong direction before crossing the street, making an entirely voluntary, though habit-directed, choice to die, even though every last one of them would certainly say that they did not prefer to die, millions of consumers may well voluntarily buy products that they do not really prefer, due to the influence of truthful, non-misleading advertisements that nevertheless appeal to the non-deliberative faculties of the brain.

The trouble with advertising is precisely that advertising influences, in Cook’s sense of the word. My argument is not that influencing itself is wrong. Influence is an essential part of political debate. We want great politicians to move us to be better than we might prefer to be. But commerce is different. The Invisible Hand only works when consumers are in the driver’s seat in markets, imposing their preferences on firms through the choices that they make. Every advertisement that influences a consumer into abandoning those preferences weakens the control of consumers over markets, putting markets into the hands of firms,  and causing markets to serve consumers that much less well.

There is nothing wrong with having a passion for a product and sharing it with other consumers, but when you are paid to do that by a firm, and the firm necessarily uses its funds to give your passion an influence greater than it would ever have were you to express it unaided, as a private citizen, then your passion becomes a method for impoverishing consumers and undermining markets. It becomes a virtuous and well-meaning thing that has been put to wasteful ends.