Do consumers benefit of advertising?
| September 28, 2007 | |
| Alexander Ginzburg | Leave a Comment |
Up until now I’ve been talking about the price that advertisements make people pay in exchange for information. I’ve also argued that this price is much higher than the fair value of the information. Some researchers along with some advertising fans (mostly those who make a living of it) explain this anomaly by some sort of a benefit that consumers get from advertisements. The most common benefit mentioned in this context is their informative value. According to this claim, the extra money paid by the consumers attributed to the information concealed in the advertisements. My immediate response to that would be: “complete nonsense”. It’s not that there is no information in ads and commercials at all, but its quantity, quality and value are negligible.
First of all, let’s talk about the quantity. How often do you encounter an ad that makes you feel lucky for not missing what ever it has to say? Frankly I find it difficult to appreciate the informative value of a typical ad that all it has to say is that I’m lovin’ it, to enjoy or just to do it. Even when we do find some useful messages, I wouldn’t put my money on its quality. How can the advertising companies, which have all the reasons to manipulate its audience, be trusted? Even if the law prevents them from lying, it doesn’t prevent them from publishing partial truth. Same as I wouldn’t want my doctor to tell me just the positive side of my health condition, I’d also wish to receive a complete information regarding the products I’m purchasing. Even if I was interested in the message delivered by the advertisements, why do I have to pay so much to hear it? Wouldn’t it be cheaper to hire someone else instead of the whole national soccer team of Brazil to tell us how great Nike’s shoes are? I’m also sure that 2.5$ million is not the best deal for an opportunity to deliver a 30 seconds message, but those beer and snack companies keep doing it every year during the super bawl. The conclusion is that the advertisements are here not to inform us, but to influence our decisions. The fact that no one would agree to pay just to watch a commercial shows that consumers don’t benefit from advertisements.
However, there is an alternative way to receive information about products and services. This way is much more objective, more credible and cheaper. It can be achieved with the assistance of journalism, in particular journalism that specializes in consumerism. By this way, people could read in the same newspaper a report about Kobe Bryant’s score in the last night game and an objective review of the new Nike’s sneakers line in two separate articles; and they wouldn’t have to pay Kobe to tell them about the shoes.
Private costs of advertising
| September 28, 2007 | |
| Alexander Ginzburg | Leave a Comment |
I’ve mentioned two types of costs caused to the consumers by advertising: public and private. In my previous posts I’ve extensively discussed the public costs that are embodied in the product’s price and paid at the occasion of a purchase. These costs are called public since all of the consumers must pay them, regardless of the degree of their exposure to advertisements. In this post I will refer to the other kind of costs, which are called private due to their dependence on the amount of a persons exposure, they are caused each time he bumps into a commercial ad.
This kind of costs is less measurable since the nature of their effect is psychological rather than financial. The essence of this effect is the influence on the consumer’s judgment with a purpose of convincing him to take irrational actions, such as preferring one product to another regardless to their quality. Although people might think that besides getting on their nerves and wasting their time advertisements have no effect on them whatsoever, thousands of studies, millions of companies and publicity budgets of billions would say otherwise. Furthermore, this state of mind of not being influenced by advertising is one of the clues that it is actually very effective.
For instance, many buyers were probably thinking that Nike’s Air Jordan sneakers were the best sport shoes ever. If they were indeed of such high quality, we should wonder whether the same shoes would make such a success with Scottie Pippen instead of Michael Jordan on the front. If you haven’t heard of Pippen, you may take it further and imagine how Air Ben-Laden would sell. I guess that probably not so well. In this case the advertisers used the immense admiration towards a legendary basketball player to sell shoes. They had bound between Jordan’s skills and the brand in order to satisfy the fans’ who wish to resemble their idol. Someone who hadn’t seen the commercial with Michael Jordan wearing those shoes wouldn’t understand why it costs 50% more than another product of the same quality. Eventually, the private costs include the differences between the benefits of rational and irrational decisions. Avoiding advertisements can save those costs.
Why do we choose to pay more?
| September 28, 2007 | |
| Alexander Ginzburg | Leave a Comment |
Previously I’ve claimed that advertising is an expensive and unfair way to pay for information. Nevertheless, it’s still a very popular currency that is constantly being used in order to acquire various types of content. The explanation to this situation is the absence of choice. Consumers are compelled to pay for advertisements while purchasing products. From that point and on, this costs can’t be refunded, which makes it “sunk costs” in economic terms. The meaning of “sunk cost” is that it is irrelevant to the decision making process, since the cost would be carried, no matter how the person would act. Consequently, at the time of decision whether to consume information financed by products’ advertising or to pay for it directly, the choice is obviously in favor of advertisements since they have been already paid for. Therefore, we don’t choose to pay more but we are forced to.
Advertising is an unfair way of payment
| September 3, 2007 | |
| Alexander Ginzburg | 3 Comments |
In order to reveal the unfairness that is concealed in the advertising as a mean of payment for information, let’s return to the hypothetic world I’ve created in my previous post. We had two products there: TV content and Cola; manufacturers and consumers of these products; and also a legislator. Previously I’ve described two situations: before and after the legislator banned soft drink advertising. In the pre-ban case the TV content was financed by advertisements that made consumers pay more for the Cola. In the post-ban case consumers paid less for the Cola but they had to pay for the TV content directly.
Now let’s assume that there are two kinds of consumers: Cola addicts, who drink a lot of Cola but never get near a TV; and TV addicts who can’t stop watching TV but never touch Cola. In the pre-ban case Cola addicts were purchasing their product and since they had to pay extra money due to advertising they were actually financing the TV content without enjoying it. Whereas the TV addicts were receiving their product for free on others’ account. This situation is not fair; since those who pay more for their product due to the advertising don’t necessary enjoy the information that is financed by it. On the other hand in post-ban case everyone pays just for his own product and that is certainly fair.
Advertising is an expensive way of payment
| September 3, 2007 | |
| Alexander Ginzburg | Leave a Comment |
Let’s see how a world with no advertising would look like. As usually, I’ll get in to my economic mood and start simplifying things. Let’s imagine a world in which people consume only TV content and Cola, for some of us it may not be so hypothetic. In this world there is only one TV station that is financed by advertising of the only two commercial companies: Coca-Cola and PepsiCo. In reality, Coke and Pepsi brands worth about 80$ billion all together. That means that they can charge us about 8$ billion above the competitive price annually, just for the brands (I’ve used a 10% capital discount rate but it really doesn’t matter, I’m just making a point). In addition, those two companies spend together about 4$ billion on advertising annually.
Let’s suppose that the legislator of this world decides to ban the soft drink advertising. Since in numerous blind taste tests, which were conducted over the years, neither of two drinks was consistently better than other, both manufacturers have no advantage over each other besides their image. Without advertising these images along with the brands would cease to exist. As a result, consumers would stop paying those extra 12$ billion every year for the brands and for their maintenance (about 20% of products’ price), and still would keep sipping the same Coke and Pepsi. The downside of this change would be the need to pay for the television content (directly or through taxes). However, earlier they had been paying extra 12$ billion while enjoying just a 4$ billion worth content (since that what the TV station had been receiving), and now they would have to pay for the content its exact value. Besides that, I claim that paying for information via advertising is less fair than paying for it directly and I will explain myself in the next post.
Public cost of advertising
| September 3, 2007 | |
| Alexander Ginzburg | Leave a Comment |
In most markets the majority of businesses advertise. No one of the parties can stop due to the fear of losing a share of the market to the competitors; consequently they keep doing it just to maintain the status quo. Since those costs become inevitable, they cause to a raise in product’s price and by that way are entirely passed to the consumers. At the end of the day, every time we put a coin in a vending machine we pay for all the silicon plants and all the steroid shots that make those men and women so happy in Coke’s commercials. Furthermore, some firms use those advertisements, which are paid with our money, to create brands that distinguish their products from the competitors’. Although this distinction is artificial and mostly based on illusions, it enables them to charge additional payment for the seeming value of the brand. For instance, Coca-Cola used the extra money charged from it’s customers for advertising to create a 70$ billion worth brand (more than a half of its whole value). The meaning of this is that Coca-Cola charges its customers for extra 2$ billion annually for advertising in order to maintain a brand that will allow it to charge them for another extra 70$ billion in the long run. Is there an alternative?
How do we pay for the information?
| September 2, 2007 | |
| Alexander Ginzburg | Leave a Comment |
I can think of two primary means of payment for information: The first way is a direct compensation for its usage. We do that every time we pay for a book, the cable TV, or the college tuition. The second option is to pay indirectly via advertisement; it’s customary in commercial TV, radio and also the Internet. Consumers make the payment by exposing themselves to advertising. As opposed to the first way, the exact price of that exposure is not obvious. One could think that it allows him to enjoy the information virtually for free, but he’d be dead wrong. Advertisements make us pay in several manners: firstly, there is a Public cost to its existence; secondly, it costs us on a personal level. I’ll talk about each one of those costs in my next posts. Besides that, I’ll try to show that watching advertisement in exchange for information is more expensive and unfair than paying for it directly.
Do search engines fulfill their economic function?
| August 19, 2007 | |
| Alexander Ginzburg | 1 Comment |
Or, what a historian and a penis enlargement expert have in common?
As I’ve mentioned in my previous post, there are two actions to be done by the mediator in order to satisfy both the suppliers and the consumers – transfer suitable information against appropriate reward. For example, a book publisher publishes the best books on subjects that the readers wish to read, people buy books that suite their taste, and eventually the publisher rewards the writers of these books. Whether the publisher hasn’t chosen the best writers, or the writers aren’t awarded sufficiently, the quality of the books will suffer because the best writers won’t write them.
In order to demonstrate the case of the Internet, I’ll use an example. Like a true economist, I’ll simplify it with an assumption that money is the only incentive that motivates the information producer (I’ll refer to other incentives in my future posts, especially to philanthropy). In one case, let’s imagine a plastic surgeon that is the leading expert on penis enlargement methods. He knows that if he shares his knowledge on a website that appears among the first results in Google, he will be rewarded for his information via advertising. However, he also realizes that the fact that he can supply information of a supreme quality isn’t enough to place him high among search results for such a commercial keyword. Therefore, his information won’t be consumed to a degree that will reward him sufficiently, so he’ll probably decide to keep his knowledge off the Internet. In another case, let’s assume that this man is a leading Historian that specializes in Italian history during the Renaissance period. There is no doubt that he could make a significant contribution to the quality of information available on the Internet on this subject. However, he knows that even if he succeeds to become a well-known authority on the subject and to climb to the peak of Google’s priority list, he won’t be financially rewarded due to the non-commercial nature of the field. Consequently, he’ll keep his distance from the Internet.
In both scenarios the Internet loses high quality information due to the inability of the search engines to accomplish their purpose. In the next posts, I’ll try to understand the reasons for the failure of the search engines to realize each one of their two tasks.
Why the quality of Information on the Internet is too low?
| August 19, 2007 | |
| Alexander Ginzburg | Leave a Comment |
Search Engine’s role and preformance in the Information market
Let’s see who the main players in the information market are. First of all there are the suppliers, people who produce information, like writers, authors, filmmakers, journalists, bloggers, scholars etc. From the opposite side there are the information consumers; those include virtually the entire humankind. In the middle there are the mediators, we can attribute to this group the television and the radio stations, newspapers, book publishers and among others also the search engines. Their purpose is to match between the demand and the supply, and that can be achieved with two steps: The first one is to transfer the requested information to the consumer from a suitable producer. The second one is to transfer an appropriate reward to the opposite direction. I claim that current search engines are fulfilling neither of these roles sufficiently and that is the main cause to the low quality of the information on the Internet. I will elaborate on this in my next post.
The next step towards the Cyber Utopia
| August 2, 2007 | |
| Alexander Ginzburg | Leave a Comment |
A lot was said about the cyber-utopia (the perfect Internet); however, we are clearly not there yet. The reason that I’m bringing this subject up is not because I know the path to that place, I think that no one does, but because I think that I know what the next step towards it should be. I can’t reveal the nature of this step yet, since we are still working on it. However, I believe that within a few months we will launch the first phase of a project that will bring us closer to cyber-utopia. Till then, I’ll keep posting ideas about what wrong with the Internet in general and with the search engines in particular as they are today, and how it should be from my point of view.
Here are some issues that I’m going to refer to in my future posts:
How do we pay for the information on the Internet and why don’t we get more for our dime?
At whose expense does Google earn so much?
Why does it take so long to find something with a search engines?
Why does the quality of the information on the Internet so low and how can it be improved?
How can Information on the Internet be made more credible?
Altruism on the Internet, what’s wrong with that?
After we lunch the project, I’ll talk extensively about each and every one of its aspects.
I hope that you keep reading this blog and eventually come and join us in our project.
Blogroll
-
Subscribe
-
