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After Advertising: The New Marketing Paradigm

Maury Rubin 06206586

ECON 480

In the 21st century, it is impossible to disregard the role that advertising

plays in consumer culture. A quick mental imaging of Times Square, laden with

big signs and bright lights helps to depict the true impact of the intrusiveness of

branded content that invades our daily lives. The function of advertising however

is quite puzzling. In the year 2009, Advertising was a $170 Billion industry in

America1, yet individuals in the industry would most likely have difficulties

proving its actual effectiveness. In the Advertising industry, agencies must defend

the effectiveness of their advertisements to their clients, while at the same time

they must convince governments and the general public that advertisements have

little impact on consumer behaviour. Thus, the consensus of much of the business

world is that although it is uncertain how advertising works, undertaking expensive

advertising campaigns is necessary in order to compete in the market.

The perceived effect of advertising poses an interesting dilemma for the neo-

classical economists who view humans as homo economicus. A common critique

of advertising posits that firms advertise to induce demand for their product by

shifting the individuals demand curve outward. However, in the conventional neo-

classical view, consumers make perfectly rational choices. They have similar, fixed

preferences for products and are endowed with perfect information with regard to

price and quality. Thus there is no reason for consumers to respond to advertising.

Yet, humans often act quite opposite to homo economicus, specifically in the realm

of consumption. Veblen for instance cites status seeking as the purpose for lavish

1 Berger pg 1 Ads, Fads, and Consumer Culture: Advertising's Impact on American Character and Society.

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consumption2. Outside the spectrum of strictly "use value", commodities serve as

nonverbal mediums which extend products past their literal and physical

properties.

What then is the actual effect of advertising on consumer behaviour? In this

paper I seek to explore the contemporary views and applications of advertising and

how they have been translated within an economic framework. I will first outline

the primary difficulty advertising posses to the study of economics. The two

primary functions of advertising, the persuasive view and the informative view,

will then be discussed in detail. The pervasiveness of information communication

technologies in the 21st century will also be a theme discussed throughout the

paper. I will argue that the diffusion of information communication technologies

has significantly impacted the nature of the information transfer between firm and

consumer causing some gaps in the traditional economic models. The new

marketing paradigm must therefore turn to the lessons learned from Behavioural

economics. If used correctly, the concepts of behavioural economics can help

advertisers fill in the gaps to better service their clients and consumers.

The word advertisement comes from the Latin root advertere, which means

to pay attention to. This etymology adequately captures the primary function that

advertising has played throughout human history. Barring the debate over its

ethical practice, advertising is a form of information transfer between the firm and

the consumer. This communication helps consumers discover the goods provided

by the firm because it allows them to collect information regarding price and

quality before the purchase decision. In the consumer decision model, access to

information plays an integral role.

2 Coyle, Diane page 119 The Soulful Science: What Economists Really Do and Why It Matters

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In their book Nudge, Cass Sunstein and Richard Thaler describe the qualities

of the Economic Man, homo economicus, and to what extent he uses information.

"Homo economicus can think like Albert Einstein, store as much memory IBM's

Big Blue, and exercise the willpower of Mahatma Gandhi"3. Neo Classical

economics portray Homo economicus as an economic agent who chooses

rationally, and unfailingly well. This is because the concept of rational choice

relies on the assumptions that agents, maximize utility, have smooth consumption,

and are endowed with perfect information. The economic man has no need for

advertising because he is assumed to be fully knowledgeable about the prices and

qualities of his preferences as well as the alternatives in the market. The alternative

and more realistic portrayal of the consumer is that they are not fully rational

beings. It is unrealistic to assume that people can store information about the price

and quality of every product on the market. Further, individual's preferences are

subject to change over time. In this view of consumer behaviour, Herbert Simon

posits that consumers are satisficers, meaning they do not make fully "rational"

choices; rather they aim to make choices that achieve satisfactory results. This is

achieved by using rules of thumb and choosing from a small subset of

considerations as opposed to the entire market of goods. In this view of consumer

behaviour advertising may actually be detrimental to the consumer even though he

lacks complete information. Though the consumer should benefit from information

that reduces their search cost, they simply cannot synthesize too much information

at once.

Identifying how advertising emerged is necessary in order to contextualize

how advertising intersects the lives of individuals in society and to determine its

effects. 3 Thaler, Richard H., and Cass R. Sunstein.page 7 Nudge: Improving Decisions about Health, Wealth, and Happiness

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The impulse to consume commodities is not unique to the 21st century. In

his book The Protestant Ethic and the Spirit of Capitalism, Max Weber reflects on

the sentiments of the famous theologian John Calvin and places them within the

context of the proliferation of capitalism. Calvin argued that God had "predestined"

a tiny minority of individuals to be saved while everyone else was condemned to

eternal damnation4. By extension, in the material world, the possession of wealth

was a divine indicator of God's blessing. Those who had wealth and the ability to

consume were blessed while those who were impoverished were not.

Consumption was consequentially perceived to be a privilege bestowed upon to

only some individuals in society. It is this theology that offered a rationalization

for consumption and which Weber attributes to rise of the "Capitalist Spirit". In

the years leading up to the industrial revolution consumption began to associate

with economic and social meaning leading to a new consumer revolution. Waves

of new commodities including coffee, tea, tobacco, foods, and dyes emerged in the

market as a result of derived discovery from colonial exploration. Accounts from

shop inventories and even commercial manuals demonstrated that new categories

of goods began to emerge in shops and homes;" more of traditional categories

appear (e.g. chairs and tables); older types of goods are made with newer and more

varied material and are completely differentiated by prices and qualities".5 Moving

into the industrial revolution a new consumer emerged. The effects of

industrialization, specifically the increases to productivity and higher wages

created a new type of consumer, one who not had desires, but could afford the new

breadth of products offered in the market. Manufacturers responded to this new

consumer by producing large inventories; however their economies of scale could

only be met if the demand for commodities could be sustained. As a result

4 Weber, Max, and Stephen Kalberg. page XXi The Protestant Ethic and the Spirit of Capitalism 5 Slater, Don page 19. Consumer Culture and Modernity

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manufactures found it necessary to advertise their products to consumer to meet

the growing demand. One century later, firms faced an entirely new circumstance.

As the market became saturated with similar goods, consumers realized they did

not need multiple versions of the same product. Innovations in the market lead to

product differentiation, and in order to achieve the same economies of scale, firms

needed to compete for market share. In this new market landscape, advertisers

turned to the newest form of mass media, the television, to communicate with the

consumer leading to the onset of the 30 second advertisement. In these 30 seconds,

firms had to stake their product's points of differentiation in order persuade

consumers to favour their brand over the others. Advertising in this era was

therefore deemed to be persuasive in nature and was associated with deception and

fraud.

In the 19th century, the theories of perfect competition prevailed, and the

formalization of the actual effects of advertising were largely ignored. Pigou for

instance remarks, "Under simple competition there is no purpose in this

advertisement because ex hypothesi, the market will take, at the market price as

much as any one small seller wants to sell."6 However, the emergence of

persuasive advertising and the deteriorating trust between consumer and firm

brought the necessity to address the effects of advertising to the foreground of

economic investigation in the 20th century.

Alfred Marshal provides some early reflections on the role of advertising in

his book, Industry and Trade: A Study of Industrial Technique and Business

Organization; and of Their Influences on the Conditions of Various Classes and

Nations. He identifies that advertising can play a constructive role by conveying

important information to consumers, specifically pre purchase information 6 Bagwell, K. Page 2 The Economic Analysis of Advertising

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including price, quality, function, and the location of products. Moreover he

emphasizes that certain advertising may be socially wasteful. Advertising that

seeks to redistribute consumers from a rival firm to another could be considered

combative and may be oversupplied causing annoyance to the consumer. Though

Marshal did not formally integrate advertising into an economic theory, he did lay

the groundwork for his contemporaries who expanded on his initial work. Edward

Chamberlin is one such economist who embraced the challenge of integration and

formalized some of advertisings effects based on the assumptions of monopolistic

industries. He argues that each firm faces a downward sloping demand curve and

that a firm can use advertising to differentiate its offerings from those of their

competitors. Chamberlin takes the effects of advertising as given and offers two

explanations for the consumer's presumed responsiveness. First, he explains that

advertising has the capability to provide valuable information to the consumer.

Second, advertising alters the consumers' wants and tastes for the firms product.

When firms advertise to draw attention to the existence of their product, they do so

to spur an outward shift of the consumer's demand curve. If advertising is used for

the first purpose that Chamberlin proposes, then this expanded demand curve will

be more elastic because the consumer will be knowledgeable about the prices and

qualities of all the goods in the market and prices should fall. If however

advertising serves its second proposed purpose, then the expanded demand curve

will be more inelastic because consumers will be loyal to certain brands and prices

will generally increase. Chamberlin concludes by stating that the net effects of

advertising cannot be resolved through theory alone and that “The effect of

advertising in any particular case depends upon the facts of the case.7” Among

these facts, Chamberlin clearly suggests that there are two main purposes for

7 Chamberlin, E.page 16 The Theory of Monopolistic Competition

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advertising and it is these purposes (informative and persuasive) that have garnered

the most debate from subsequent economists.

The persuasive view of advertising primarily emphasizes advertising's

ability to influence demand by changing consumer's tastes. In this perspective,

advertising plays a valuable role in achieving economies of scale for the firm

which may exert a downward price influence. Proponents of this view however

often conclude that the effects of brand loyalty tend to raise prices and deter

market entry from competition.

Robison, a contemporary of Chamberlin takes for granted that "the

customer will be influenced by advertisement, which plays upon his mind with

studied skill, and makes him prefer the goods of one producer to those of another

because they are brought to his notice in a more pleasing and forceful manner".8

Likewise, Robinson remarks that when "a firm finds the market becoming

uncomfortably perfect, it can resort to advertisement and other devices which

attach customers more firmly to itself"9. In total Robinson believes that advertising

creates a net loss for the consumer because established firms who can afford to

advertise will obtain monopoly power in a market where traditionally they would

be regulated by competitive forces.

Braithwaite contributes additional support for the foundation of the

persuasive view. Advertising is considered to be a selling cost to the firm whose

purpose is to re-arrange consumers' valuations so that the consumer places a higher

value on the products of the firm. Advertising shifts out a consumer's demand and

it thus distorts the consumer's decision as compared to those that reflect his true

preferences. Braithwaite argues that advertising creates a loss in the market

because consumers are enticed to buy the wrong quantities of goods that are not

8 Bagwell, K. Page 9 The Economic Analysis of Advertising 9 Bagwell, K. Page 9 The Economic Analysis of Advertising

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well adapted into their true needs, at higher prices. Further, Braithwaite advances

the entry deterrent effect that advertising causes through brand loyalty. Established

firms create reputations around their brands, and the only way new entrants can

succeed in the market is by developing their own unique brand. The necessary

expenditures to differentiate a new brand however may be too high for entering

firms causing them to shy away from the market. Advertising thus may result in

the formation of reputational monopolies adding weight to the claim that adverting

leads to higher prices and lower welfare. Reputation, she states, may provide some

consumer welfare. A well established brand may signal to the consumer a certain

level of quality. Since established brands have a lot to lose if their products are

discovered to be of low quality, advertising may be an indirect guarantee of the

product's reliability to the consumer. Building off the assumptions of homo

economicus specifically the endowment of perfect information, Braithwaite

concludes that this signaling effect, if any, is redundant because a reliable retailer

already offers an implicit guarantee of quality of their products.

Finally, Kaldor addresses why advertising may warrant a shift in the demand

for a firms product. Kaldor interprets advertising as a complementary good, one

that increases the demand of another good, and it is sold jointly with the desired

product. Though he concedes that advertising may offer some valuable

information, he emphasizes that firms will over supply advertising in order to

provide a marginal amount of this information.

Conversely, the informational view promotes advertising as an attractive

means for firms to convey information to the consumer. Stigler comments that

price dispersion in the market is a reflection of the ignorance of consumers where

this ignorance is derived from the search cost for information. Advertising works

to educate consumers about the prices and qualities of goods in the market and

exerts a downward pressure on prices due to increased competition.

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Telser, a supporter of the this view investigates the foundations of the

informative view and posits that presence of advertising is positive indicator that

there exists competition in the market. He suggests that in a competitive

framework, some initial advertising must be made in order to inform consumers of

the firm's existence. Through an empirical assessment of advertising intensity and

other market variables, Telser draws two conclusions about the nature of

advertising. He first notes that if advertising fosters monopoly power, then market

concentration and advertising should be positively correlated. "For 42 consumer-

goods industries, Telser calculates concentration and advertising-sales ratios for

three different census years. He then considers a linear regression of concentration

on advertising intensity, and he reports a positive but very weak relationship."10

Second he examines the relationship between advertising and market share. He

addresses the notion that if advertising is successful at protecting a firm from

market penetration then there should be a positive correlation between advertising

and market share stability. Using various measures he concludes that market share

stability and advertising are inversely related thus refuting the view that advertising

stabilizes a monopolist's power.

Nelson contributes to the informative view by commenting on the quality of

information obtained through advertising, specifically, he addresses how

advertising actually provides information to the consumer. When the content of an

advertisement is centred on price and quality, the transfer of information is clear;

however there are many advertisements that hardly display any such information.

Nelson argues that in these cases advertising still plays a crucial role in

transmitting indirect information about the product and the firm. Firstly,

advertising can be used by the firm to signal the firm's efficiency to the consumer

which implies that they can also develop products of good quality. Second 10 Bagwell, K. Page 17 The Economic Analysis of Advertising

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seemingly unimportant information in a certain advertisement may be very

important to some consumers. A seemingly uninformative advertisement may

allow firm to direct their messaging to certain consumers and help match products

to buyers. And thirdly, advertising may remind consumers of their last experiences

with a product prompting them to repeat purchase with the firm.

These initial wirings of both the persuasive and informative view offer some

basic conceptual frameworks in which to view the effect of advertising. Clearly

though attempting to determine the net effects of advertising on consumer

behaviour and surplus is difficult through economic theory alone. While both the

persuasive view and informative view supporters make strong cases for their

validity, the overall implications differ drastically. The effects of advertising

continue to be the subject of dispute among economists because these models are

subject to important limitations mainly that they fail to consider humans as

anything other than utility maximizers. Today, the study of advertising has

fortunately accepted these limitations and researchers have begun to explore

different academic disciplines to explain its effect. Flemming Hansen for instance

notes that the "understanding of consumer behaviour must be based in individual

psychological theory and that is must build bridges from here to traditional

economic theory."11

The traditional models and perceived economic effects of advertising are not

conducive with the current media landscape. Since advertising is a form of

communication it is vital to understand how the shift in the modes in which

humans communicate has altered the way in which information is acquired. Smith

et al. identifies the key components of the transfer of information: "who says what

to whom through which channels and with what effect"12. Carl Hovalnd's classical

11 Hansen, F. Page ix Consumer Choice Behaviour 12 Hansen, F. Page 164 Consumer Choice Behaviour

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model of marketing communication depicts a communicator, a media, content, a

receiver and some effects. In his model when the consumer is met with

information, he is always faced with a message designed by a communicator and

presented in a medium decided by a communicator. Hansen observes, "To the

receiver the "who, what, and which" of the classical formula is one entity"13. This

classical formulation of information transfer suggests a one-way flow of

information and is akin to the advertising experience of the 19th to 20th century.

The present formulation is much more complex and information communication

technologies have created and environment in which the audience are now active

participants in the transfer of information.

This new media environment raises implications that challenge the

assumptions underlying the persuasive and informative views of advertising.

Whereas the traditional views takes the effects of advertising as given, the current

literature emphasizes that "the situations in which communication occurs have

been found to be related to the effectiveness of persuasion or the degree of

effectiveness in bringing about reinforcement, attitude change, or conversion"14. In

these new media situations, there must be a shift away from the traditional means

of advertising. Utilizing behavioural economics however offers a wide variety

tools which advertisers may use to create value not only for their customers but for

the consumers of the final product.

The role of the communicator found to play an important role in whether the

information it provides will be accepted as valid. An audience is most likely to

have opinions and predispositions regarding the source of the communication and

this audience image of the source will affect the communication's persuasive

13 Hansen, F. Page 165 Consumer Choice Behaviour 14 Markin, Rom J. Page 325 Consumer Behavior; a Cognitive Orientation.

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intensity15. Sources that are viewed as responsible and trustworthy will be viewed

favourably and the consuming audience will be more predisposed to accept their

messages. Creating a trustworthy brand is therefore a primary interest of

advertisers. In order for future brand messages to be accepted by the consumer, a

trusting relationship with the consumer must be formed. Manufactures must ensure

that their products perform how they are advertised, and advertisers must address

customer concerns as they arise. Today information communication technologies

have allowed advertisers to quickly respond to customer concerns, and even

address them before they result in a negative relationship between the firm and the

customer. Mcdonalds for instance launched a campaign called Our Food Your in

an effort to be more transparent and put rest to some of the myths surrounding its

food, preparation, and packaging. Customers were encouraged to submit questions

on a dedicated website and all questions were answered with open and honest

responses, some in the form of text, images and videos. In total, the campaign

generated more than 13 million video views, 132 million media impressions, 2.3

billion social impressions and they answered 18,462 questions16. Where

Braithwaite would argue that advertising's signaling effect is redundant because a

good firm already offers a good product, real consumers are reassured by a

trustworthy source and gain value from reliable brands. Establishing a two way

communication between the consumer and the firm also encourages consumers to

take ownership of the brand by engaging in conversation. When a consumer takes

ownership of a product they revalue it, resulting in a reluctance to give it up. Diane

Coyle adequately summarizes that "we are much more averse to losing something

15 Markin, Rom J. Page 326 Consumer Behavior; a Cognitive Orientation. 16 Martketing Staff. Our Food. Your Questions wins big at 2013 marketing awards. May31,2013 .http://www.marketingmag.ca/news/agency-news/our-food-your-questions-wins-big-at-2013-marketing-awards-80094

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we have than we are attracted to making the same size gain"17. This endowment

effect can help firms add value through transparent communication while retaining

customers.

The channels of communication themselves have been proven to be an

effective force in influencing a desired effect. Until only recent history mass media

reigned as the sole channel for which information was disseminated. In the 19th

and 20th century, newspapers and televisions respectively were the avenues in

which advertisers reached the consumer. For this reason it is understandable that

many advertisements, especially in the 20th century contained information that had

little relevance to price or quality. As Nelson acknowledged some seemingly

unimportant information to one individual may be vital to another in making a

consumption decision. The drawback of disseminating through mass media though

is that messages cannot be segmented to reach certain individuals and therefore

this type of cryptic advertising will be oversupplied. From a behavioural

economics standpoint oversupplying this type of advertising should decrease

consumer welfare. Though it is believed that obtaining more information is

beneficial, consumers often struggle when they are presented with too many

options because they must juggle too much information. A research study in which

consumers were asked to try jams from a sample of 6 jams versus a sample of 24,

30% of consumers went on to make a purchase when presented with 6 samples,

whereas only 3% of consumers made a purchase when presented with 2418. This

illustrates that when individuals are overloaded with information and choice they

are often turned off from the desired purchase behaviour. Technologies like the

internet, mobile phones, and social media have allowed advertisers to tailor their

messages directly to the needs and desires of individuals which help reduce the

17 Coyle, Diane page 135 The Soulful Science: What Economists Really Do and Why It Matters 18 Strong,C Koutmeridou K. Behavioural Economics and the Consumer Journey. 2012. http://www.gfk.com

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clutter of unwanted alternatives. If a consumer for instance "likes" or "follows" a

brand on a social networking site, that brand can build a profile based on this

consumers needs, and directly offer him information about their products. Where

mass media offers broad and excessive information, information communication

technologies offer segmented and relevant information.

The actual message and how it is structured by the firm has an effect on

the persuasiveness of the communication. Though the persuasive view suggests

that advertising plays upon the consumers mind using deception Markin argues

from a psychological standpoint that "messages that are clearly stated, simple in

construction and unambiguous have a better chance of clearly conveying the

attitudes and wishes of the sender and thus have a greater likelihood of bringing

about their desired results."19 It is for this reason that advertisers need to strongly

consider the content that is put into an advertisement. Regardless whether the

advertisement displays more direct information or more indirect information, if the

message is not clear and concise it will ultimately be a waste. Again, consumers

are not able to manage too much information, so it is imperative that the words and

visuals used actually help consumer's simplify the complex myriad of everyday

decision making.

One study helps illustrate this point by looking at the process in which UK

court officials make decision on whether to grant individuals bail. Though the

court officials are instructed to make their decision based on a wide range of

different criteria, in the vast majority of cases only one or two pieces of

information influenced the official's decision. To this effect, in order for firms to

achieve success it is necessary for them to understand the consumer and indentify

19 Markin, Rom J. Page 326 Consumer Behavior; a Cognitive Orientation.

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what they truly value when generating marketing material rather than try to appeal

to subliminal marketing tactics as posited by the persuasive view.20

Advertisers must not only be aware of what content is placed in an

advertisement, but also how it is arranged. Countless studies have shown that

information framed in specific ways has a direct effect on the consumer choice and

perceived value of a product. Research by Levin et al. showed that consumer's

judgement on the quality of meat could be changed if quality was expressed in

either its percentage of fat (negative condition) or percentage lean (positive

condition). For example, the purchase of $1.50/lb. -80% lean in the positive

condition was represented as $1.50/lb. -20% fat in the negative condition. They

found that "satisfaction ratings were significantly higher in the positive condition

than in the negative condition, both when respondents evaluated purchases

described by price-quality combinations and when they evaluated purchases

described by quality alone21. In the new media landscape, consumers have the

ability to search for information in a plethora of locations. It is therefore important

that when the consumer pays attention to a firm's advertisement that sparks their

interest; they are thoroughly convinced of the value they will gain from engaging

in consumption.

In a lecture recorded of Rory Sutherland Vice Chairman at the advertising

agency Ogilvy Group he remarks that behavioural economics helps turn human

understanding into a business advantage. Humans are not necessarily conscious of

their biases so it is possible that advertisers could exploit them by utilizing

behavioural economics. Sutherland clarifies that advertising largely abandoned its

pursuit of behavioral science and psychology because it got frightened when

motivation research emerged and revealed to the public that there might

20 Strong,C Koutmeridou K. Behavioural Economics and the Consumer Journey. 2012. http://www.gfk.com 21 Matal ,S. Page 138 Applied behavioural economics

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unconscious motivators behind decision making. As a defensive maneuver the

advertising industry got out of the field of psychology because they were content

with running large budget advertisements on television and did not have to justify

their results with scientific analysis. For reasons of expediency it was worth

jettisoning the entire practice. The traditional views of the effects of advertising

reflect the sentiments of the public during this era. Advertising could be either a

net benefit or a net loss; it either informed the consumer or tricked them into

become insatiable. In reality the consumer enters the market with a variety of

biases and predispositions. In the current media landscape with an increased

consumer interaction with each other and firms, marketers have the unique

opportunity to address these biases and create value when once they could not.

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Bibliography

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Coyle, Diane. The Soulful Science: What Economists Really Do and Why It Matters. Princeton,

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Hansen, F. Consumer Choice Behaviour, The Free Press, 1972, Print

Martketing Staff. Our Food. Your Questions wins big at 2013 marketing awards. May31,2013

.http://www.marketingmag.ca/news/agency-news/our-food-your-questions-wins-big-at-2013-

marketing-awards-80094

Markin, Rom J.Consumer Behavior; a Cognitive Orientation. New York: Macmillan, 1974. Print

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Slater, Don. Consumer Culture and Modernity. Cambridge, UK: Polity, 1997. Print.

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Strong,C Koutmeridou K. Behavioural Economics and the Consumer Journey. 2012.

http://www.gfk.com

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