Advertising is a hugely influential part of society and business yet it is never mentioned in traditional economics. In neo-classical economics, firms do not advertise. This is not a trivial omission because advertising has an enormous effect on the market. Roughly $500 billion dollars was spent on advertising in 2011. Nor is its omission a simple mistake. Rather it is deliberate because once you examine advertising, you see what an enormous distorter of the market it is.
In any textbook example of perfect competition, all goods are homogenous (i.e. the same) and all consumers have perfect information. In this world there is no need for advertising because consumers know everything there is to know about the market. Likewise rational actors would not be swayed by marketing ploys or information irrelevant to the product (why would a beautiful model make a rational consumer more likely to buy the good?). It is for this reason that textbooks don’t mention advertising, to do so would to be to admit that consumers are irrational and that the market could be distorted.
Let’s examine the logic of advertising. The goal of advertising is to increase sales of the product either by convincing people who wouldn’t have otherwise bought the product to buy it, or by convincing existing consumers to buy more. This seems very obvious, but it goes against most of what economics students learn. Most economics lecturers explain that consumers choose what to buy based on their preferences and tastes. It is therefore wrong for the government to intervene because consumers alone know what’s best for themselves. However, if preferences can be manipulated or changed, then the standard theory of consumer choice goes out the window.
Take the standard economics notes and imagine a consumer is choosing how much pizza and chips to buy (I don’t know why but the examples are usually pizza and chips or some kind of fast food). A consumer makes a rational choice taking all the benefits and costs of either option before deciding to get, say, 5 slices of pizza and 2 portions of chips (like all examples in lectures, it is ridiculous simplified with only one consumer, two goods and no money). The lecture usually ends with a tribute to the sovereignty of the consumer in the free market, who simply by exercising choice, they end up in the optimal position that most improves their life. Let’s say now the chip company takes out an ad that boosts sales, so now the ratio is 4 pizza and 3 chips. What has happened? Has the market been distorted? Has the sovereignty of consumers’ preferences been violated?
This is why advertising is not discussed. It ruins the aura and glory of the free market and raises the possibility that leaving consumers to decide themselves isn’t as perfect as it first sounds. If a firm advertises, then it incurs a cost, therefore it will have to raise its price. Therefore a marketplace with advertising firms is less efficient. This is especially true in cases where advertising resembles an arms race where large amounts are spent with little gain. Goods are no longer sold at the lowest possible price and worst still choice is not made on the basis of quality but on irrational and irrelevant grounds.
A crucial point about advertising is that it is not commercial, but emotional. By this I mean ads do not try to convince you that a certain product is cheaper or more efficient, rather they aim to make the product seem enjoyable. A typical ad will show young, handsome, stylish people using the product and having fun. The implication is that if you use this product (even if it is not the cheapest or best quality) then you too will be popular and happy. Ads mainly try to make an emotional rather than logical connection with consumers and it is rare to even see the product in an ad. (After writing this, I stopped and watch some TV and therefore ads. The only ads that directly mention prices or compared products were the financial industry, probably the most rigid industry where few consumers switch supplier). Humour is another common method, the aim being to create positive connotations with the product.
Other common methods include celebrity endorsements which also create connotations between popular people and the product. Or just peer pressure where an ad shows large groups of people. Humans by our nature are social animals and we instinctively follow a group. This is natural as we trust other people and have an urge to associate with them. This is why the key to a successful consumer product is not low prices or a good quality, but popularity. If many people buy a product, this is one of the largest influences on getting other people to buy it. (Of course price and quality can influence whether or not a product is popular but it is rarely the largest influence). The world of sales is dominated by fads and fashions where some goods become “hot” or popular and everyone wants to buy them. The largest determinant of whether someone will commit an act ranging from smoking, to stealing, to buying a car to getting pregnant, is whether or not other people they know do so as well.
All of this is to say nothing of the hint of sex in advertising . . .
Advertising need not be an entirely negative influence. After all, it can provide consumers with information about how one product is better or cheaper than others. However, all businesses will try to show that their product is the best even if it isn’t. This is why if you turn on your television, you will not see any ads that compare their product with their rivals. Instead they barely even mention the product at all, engaging instead with shots that are irrelevant to the product (beautiful models, people laughing, scenes of home etc). If we were rational these would have no effect, but we are irrational so they do (otherwise why would companies spend so much money on them?).
This leads us onto the effect of brands. Many consumers have a connection and loyalty to a brand that no orthodox economist can explain. Consumers should shop around for the best deal and not make purchases for any other reason. However marketers have long known that this is not the case. Once people make a decision to but a certain product, they usually stick with it. People build a connection with a brand that is in some regards irrational. Even if a cheaper or better product is available, people will stick with “their” brand in the same way a fan will stick by their team even when its losing. Psychologists have found that a large amount of what we call attraction in fact comes from familiarity. Advertising makes a product more familiar and therefore more attractive (I have witnessed this first hand and have found myself strangely drawn towards brands I recognised from TV even if they weren’t the cheapest). In fact (as detailed in No Logo) major corporations like Nike and Coca-Cola are moving away from actually producing products and focusing instead on advertising and branding.
What would a world without advertising look like? Well, products would be cheaper as money currently spent on advertising would go into reducing the price or improving product quality. With advertising influencing demand, consumers would make better choices based on actual differences rather than on emotional impulses. Consumerism would suffer and people would buy less. People would not look for joy and fulfilment in material goods. The market would be more efficient and be a greater benefit to consumers. That is why advertising is one of the greatest distorters of the market.