The Evolving Economics of Advertising

By: Emman Raja

Any first year Economics student at St Andrews can tell you that advertising ‘shifts demand to the right, creating a new price equilibrium’. But beyond affecting price, what else do we know about the economics of advertising, and how it is evolving in the 21stcentury?   

Back in the 19th century, advertising was a concept of no deep interest to economists because it was thought to be simply a means of publicising a product or service to the general community. However, around the start of the 20th century, big industrial giants such as Ford Motor Company began to acknowledge the importance and economic opportunity of advertising. In the 1890s, Alfred Marshall described advertising’s role as either constructive (where customers benefited by information directing them to cheaper, higher quality products) or combative (offering little information, only serving to redistribute customers from one competitor to another, thus working in favour of Monopolies, which strive to keep competition out of the industry, and Oligopolies, which strive to drive it out).

The real evolution of advertising in the 20th century came as economists began to view advertising as the most efficient way to boost demand. In the 1930s, the American economist Edward Chamberlin posited the persuasive view, claiming advertising altered consumer preference and established brand loyalty. In addition, Chamberlin stated that advertising could be used as the perfect strategy to deter market entry of potential competitors, which holds true even today. By the 1960s, Andrew Ozga identified another theory of advertising, the informative view. Ozga strongly believed that advertising affected demand by conveying information, essentially driving down prices instead. Ozga’s theory rests on the assumption that advertising is most useful to efficient firms that set lower prices in comparison to their competitors and reap the benefit from production scale economies (though it should be mentioned that informative advertising only affects those with a high degree of imperfect knowledge on the product). Lastly, thecomplementary view developed in the mid 1970s by economists such as Lester Telser and Alistair McGowan, highlighted the importance of advertising on a consumer’s utility. This view linked to the idea and value of ‘social prestige’ that consumers receive when purchasing a product/service. For example, take the Sean Connery advert in 2008 where he poses with a Louis Vuitton bag in the Bahamas. The complementary view urges consumers to believe that having this certain product will allow one to look as cool as Sean Connery if (a) one actually possesses such a bag, and (b) the advert links the bag to the cool attitude that the individual wants to project in their relevant peer group. The complementary view furthermore highlights that the more a company advertises, the more desirable their good becomes.

In the 21st century, advertising continues to evolve.  Many concepts established years ago are still in motion today, however, traditional methods of using informative, persuasive, and complementary advertising have drastically changed due to the emergence of technology as well as shifts in societal ways and culture.  For example, traditional advertising methods such as billboards, pamphlets and posters have died away, replaced by snazzy electronic adverts and online advertising nowadays. Local and international companies attempt to take advantage of the younger generations’ constant online presence by swamping social media such as Facebook and Twitter with advertising in the aim of promoting themselves to an audience as wide as possible. But has this come at a cost? Can an organisation truly persuade or inform a potential consumer that their product has ‘social prestige’ through a computer screen? Most of the time, the consumer tends to ignore the typical e-bay or protein shake advert lurking at the top right-hand corner of the screen. It is simply not flashy or helpful enough to grasp their attention. Moreover, we must also consider the increasing negative association and annoyance with digital and social media.  Have you ever wondered why suddenly more hotel adverts pop up on Facebook or Google when you just booked a night in Premier Inn? This is because firms all over the world are able to track the movements of consumers’ online journeys through ‘cookies’ – small pieces of data that identify each user with a unique code. It is safe to say that the average consumer is generally irritated by these tactics. Furthermore, this form of advertising is risky to brand reputation. During the uprising in Egypt in February, 2011, fashion designer Kenneth Cole saw an advertising opportunity when masses gathered in Tahrir Square demanding freedom from decades of dictatorship. Cole tweeted: ‘Millions are in uproar in #Cairo. Rumour is they heard our new spring collection is now available online’. Two hours and thousands of angry replies later, Cole apologized. Not only did he see a decline in online followers, but also a stigma was associated with his brand for months after this single event.

So far, new technologies that make advertising innovations possible are well ahead of proof whether what is possible is also profitable. Until more rigorous ways are devised to measure advertising’s economic impact, perhaps it would have been best to stick with good old persuasive Bahamas and Sean Connery.

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