Mcom 341-3 Economics, Regulation


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Mcom 341-3 Economics, Regulation

  1. 1. Advertising’s Economic Impact & The Regulation of Advertising<br />
  2. 2. Name that Brand… <br />What brand comes to mind first?<br /><ul><li>Toothpaste
  3. 3. Laundry detergent
  4. 4. Shampoo
  5. 5. Paper towels
  6. 6. Toilet paper
  7. 7. Deodorant</li></li></ul><li>Name that Brand… <br />What brand comes to mind first?<br /><ul><li>Cereal
  8. 8. Soup
  9. 9. Fast food
  10. 10. Pizza
  11. 11. Soft drink</li></li></ul><li>Name that Brand… <br />What brand comes to mind first?<br /><ul><li>Car insurance
  12. 12. Jeans
  13. 13. Tennis shoes
  14. 14. Pain reliever
  15. 15. Cell phone
  16. 16. Bank</li></li></ul><li>Per Capita Ad Spending<br />Gross Domestic Product (GDP) = the total market value of goods and services produced by workers and capital within a nation's borders1<br />1 Source: Princeton Univ, <br /><br />
  17. 17. Today’s Objectives<br />Discuss the impact of advertising on the economy<br />Describe how government agencies regulate advertising to protect both consumers and competitors<br />Discuss the activities of nongovernment organizations in fighting fraudulent and deceptive advertising<br />
  18. 18. Economic Impact<br />Free-Market Principles<br />Self-interest<br />Completeinformation<br />Many buyers& sellers<br />Absence ofexternalities<br />
  19. 19. Economic Impact at a Glance<br />Four Key Areas<br />Advertising can impact the economy in 4 key areas:<br /><ul><li>Product values
  20. 20. Prices & competition
  21. 21. Consumer demand
  22. 22. Consumer choice</li></li></ul><li>Product Values<br />Advertising adds value.<br />In the minds of consumers, a recognized (through advertising) brand has added value.<br />Consumers will pay more for a known brand, even when its unknown competition is functionally identical.<br />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. <br />Do the brands we buy send a message about who we are?<br /><ul><li>Clothes
  23. 23. Shoes
  24. 24. Cars
  25. 25. Hairstyles
  26. 26. Cell phone</li></li></ul><li>Product Value<br />Rank these women’s jeans from least expensive to most expensive.<br />C<br />B<br />A<br />
  27. 27. Product Value<br />Answer: B, A, C <br />A<br />B<br />C<br />Gucci, $585<br />Lucky, $90<br />Levi’s, $20<br />Source: <br /><br />Source: <br /><br />Source:<br />
  28. 28. Pricing<br />Would less advertising = lower prices?<br />Advertising can decrease or increase the price of goods, but it generally decreases the prices consumers pay, because there are many buyers and sellers.<br />INCREASE<br /><ul><li>The cost of advertising affects the manufacturer’s expenses
  29. 29. Manufacturers use advertising to stress desirable brand features, increase cost</li></ul>DECREASE<br /><ul><li>Mass production lowers unit costs, selling price
  30. 30. In retail, consumer focus on price drives prices down through competition</li></ul>= 1 cent on advertising<br />Photo c/o Coca-Cola Company<br />
  31. 31. Competition<br />Can only the biggest companies compete?<br /><ul><li>Competition tends to reduce the number of businesses in an industry (the strong and/or smart survive)
  32. 32. Small, regional businesses can compete with larger corporations on a local level with a sound marketing plan</li></li></ul><li>Consumer Demand<br />You have to have it, because…<br />Does advertising generate consumer demand? Or does it simply respond to it? <br />Source:<br />
  33. 33. Consumer Demand<br />Primary vs. Secondary Demand<br />Advertising can drive sales of an entire product class or of a brand.<br />Primary Demand: Grow demand for industry, product class<br />Secondary Demand: Grow demand for a specific brand<br />Source:<br />Source:<br />
  34. 34. Consumer Demand’s Impact<br />GROWINGMARKET<br />Mobile phones<br /><ul><li>Consumer demand increases the total market, i.e. the size of the pie
  35. 35. Advertisers compete for shares of growth
  36. 36. Brands may increase
  37. 37. Prices may decrease</li></li></ul><li>Consumer Demand’s Impact<br />STATIC MARKET<br />Pharmaceuticals<br /><ul><li>Advertisers compete for each other’s shares
  38. 38. Brands may decrease
  39. 39. Prices decrease
  40. 40. Consumer demand keeps the market at same overall value, i.e. the pie doesn’t grow or shrink</li></li></ul><li>Consumer Demand’s Impact<br />DECLINING MARKET<br />Watches<br /><ul><li>Consumer demand shrinks the market, i.e. the pie becomes a tart
  41. 41. The market may segment itself (luxury)
  42. 42. Advertisers compete for each other’s shares to maintain revenue
  43. 43. Brands may decrease
  44. 44. Prices may increase</li></li></ul><li>Consumer Choice<br />The Importance of Product Differentiation<br />In a free market where consumers have a multitude of choices within a product class, advertisers must demonstrate to consumers what makes their product different.<br />Doing so appeals to our need for complete information and an absence of externalities.<br />You want an SUV, eh? Which one?<br />Ford Escape Hybrid<br />Cadillac Escalade<br />Nissan Juke<br />All car photos from<br />
  45. 45. The Abundance Principle<br />Self-interest<br />Completeinformation<br />Absence ofexternalities<br />Many buyers& sellers<br />In an economy that produces more goods & services than can be consumed, advertising:<br />Allows more effective competition<br />Keeps consumers informed of alternatives<br />Stimulates competition<br />Self-regulates to keep market free & open<br />
  46. 46. Broadcast media licensing<br />Examples: programming times and stations for ED drugs , Janet Jackson’s “wardrobe malfunction”<br />Deceptive, unfair, & comparative ads<br />Example:<br />Activia claim to improve digestion<br />Definitions and labeling of consumer packaged goods and drugs<br />Examples: pharma side effects, Yaz retraction<br /><br />Intellectual property<br />Examples: Coca-Cola logo, contour bottle design, secret formula.<br />Copyrights “works of authorship”<br />Example: GEICO advertising campaigns<br />Federal Regulation Agencies<br />These are the federal departments and agencies that regulate advertising and their areas of responsibility:<br />FCC<br />Federal Communications Commission<br />FTC<br />Federal <br />Trade Commission<br />FDA<br />Food <br />& Drug Administration<br />Patent & Trademark Office<br />Library of Congress<br />
  47. 47. FDA Disclosure<br />This ad for Revolution, a topical parasiticide for dogs and cats, has a long disclosure<br />
  48. 48. State & Local Regulation<br />Different states have different regulations governing advertising<br />E.g. NC law requires businesses to get a permit before advertising an “out of business” sale<br />National marketers comply with states’ laws<br />Local government regulation: city & county consumer protection agencies<br />
  49. 49. Nongovernment Regulation<br /><ul><li>Better Business Bureau (BBB)
  50. 50. National Advertising Review Council (NARC)
  51. 51. National Advertising Division (NAD)
  52. 52. National Advertising Review Board (NARB)
  53. 53. Regulation by the media
  54. 54. Regulation by consumer groups</li></li></ul><li>Self-Regulation:Agencies & Associations<br />Research and verify claims &comparative data before use<br />Agency Responsibilities<br />Liable for misleading or fraudulent claims<br />Some maintain in-house legal counsel<br />American Association ofAdvertising Agencies (AAAA)<br />Industry-WideAssociations<br />American Advertising Federation (AAF)<br />Association of National Advertisers (ANA)<br />
  55. 55. Self-Regulation: AAF Principles<br />
  56. 56. International Advertising<br />Foreign governments often regulate advertising more strictly than in the United States<br />Some governments ban specific products<br />Many countries prohibit puffery<br />Many European countries ban coupons, premiums and free tie-ins<br />Across Europe, paid product placements in television programs are typically prohibited<br />Examples from France: <br />Alcoholic beverage companies are banned from sponsoring sporting events, prohibited from advertising on TV, and alcohol advertisements are very restricted in other media.<br />All words in advertisements must be in French, even if the word or phrase is more common in another language.<br />Sources: 1) FTC,<br />2) International Business Law and Its Environment, R. Schaffer, F. Agusti & B. Earle, 2008 <br />
  57. 57. Supreme Court: “speech” or “commercial speech”<br />Tobacco Controversy<br />Consumer Privacy<br />Current U.S. Regulatory Issues<br />Advertising to Children<br />
  58. 58. Supreme Court: “speech” or “commercial speech”<br />Current U.S. Regulatory Issues<br />Does the First Amendment protect advertising?<br />The Supreme Court first ruled in 1976 that advertisements enjoy protection under the First Amendment. <br />(Case: Virginia State Board of Pharmacy v. Virginia Citizens Commercial Council)<br />They issued a 4-part test in 1980 to determine whether commercial speech can be regulated: <br /><ul><li>Does the commercial speech concern a lawful activity?
  59. 59. Does restriction serve the government interest?
  60. 60. Does regulation advance the government interest?
  61. 61. Is the restriction no more than necessary to further the interest?</li></ul>(Case: Central Hudson Gas v. Public Service Commission)<br />In 1993, they determined that the distribution of advertising is as protected as distributing newspapers.<br />
  62. 62. Tobacco Controversy<br />Current U.S. Regulatory Issues<br />About that First Amendment Protection…<br />The harm created by smoking is a significant externality, or social cost. <br />In 1998, states’ attorney general reached a settlement with the tobacco industry that mandated significant reform of tobacco marketing.<br /><ul><li>No advertising to children
  63. 63. No outdoor advertising
  64. 64. No sponsorships at events with youth oriented audience
  65. 65. No cartoon characters in advertising</li></ul>Lucky Strikes cartoon ad, 1955: <br /><br />Goodbye, Joe!<br />
  66. 66. Santa had to quit, too!<br />
  67. 67. Advertising to Children<br />Current U.S. Regulatory Issues<br />Come on…<br />No one would ever advertise inappropriately to / with children!<br />Would they?<br />
  68. 68.
  69. 69.
  70. 70.
  71. 71.
  72. 72. Advertising to Children<br />Current U.S. Regulatory Issues<br />Kids are not sophisticated consumers and can’t be treated as such.<br />The Council of Better Business Bureaus established the Children’s Advertising Review Unit (CARU). CARU reviews and evaluates advertising directed at children.<br />CARU seeks voluntary cooperation from advertisers in advertising to children under age 12 (page 41 of text).<br />M&M’s commercial, 1980s:<br /><br />M&M’s commercial, today:<br /><br />
  73. 73. Consumer Privacy<br />Current U.S. Regulatory Issues<br />Is your personal information private?<br />A person’s likeness cannot be used in a commercial without their permission.<br />Today’s controversies are primarily in the digital world:<br /><ul><li>What gets shared on Facebook
  74. 74. The ability of companies to track behavior online
  75. 75. SPAM emails</li></ul>For now, the only regulation is self regulation.<br />