Advertising and the market equilibrium

[KurtFF8]

I'm finishing up a health care class where my professor made the argument that supplier induced demand on behalf of doctors, insurance companies and pharmaceutical companies inevitable leads the market away from the "natural" supply and demand equilibrium point.

I thought about it and I think this logic could be expanded to all advertising in general, as companies pour quite a lot of resources into advertising their products, and their methods often (at least in most cases) include misleading phrases/arguments. Wouldn't this supplier induced demand also help move us away from the "natural" point where the market is supposed to get us to as well? It seems that one can't accept that getting to this point through a "natural market" is a good thing while also supporting advertising's "right to exist" as advertising ,under this picture, is detrimental to an efficient market.

Interestingly, after I typed the above, I saw that one of the new Monthly Review articles is titled: The Sales Effort and Monopoly Capital (http://www.monthlyreview.org/090406-mcchesney-foster-stole-holleman.php) by Robert W. McChesney, John Bellamy Foster, Inger L. Stole, & Hannah Holleman were they detail advertising's role in the Monopoly Capital era (an argument that MR has been making for some time now).

The article goes into the deeper problems of the current era of capitalism but parts of the beginning highlight my point:


Advertising is simply taken as a given, much like the Rocky Mountain range, a neutral institution there to connect businesses to consumers with the information they need to make buying decisions.

We begin with two simple points. First, any advanced and complex economy needs an information system to allocate goods and services effectively. Contemporary advertising is not the result of providing this necessary service—if it were, the information for consumers would be far more useful and intelligible than that provided by advertising. Rather, it is aimed principally at fulfilling the profit needs of advertisers themselves. Advertising thus reflects the balance of forces in the monopoly capitalist economy. It is, as James Rorty once put it, with regard to business power, “our master’s voice.”5 This voice is more powerful in the United States, where the power of capital versus labor is stronger than it is in the other advanced economies. It was, as we shall see, not coincidental that when labor was strongest in U.S. history that the “master’s voice” faced its most serious challenge. Second, advertising as we know it, or the sales effort more broadly, is not the result of free markets or “free enterprise” or capitalism per se; it is the result of a certain type of capitalism, best exemplified by the United States; one typified by large corporations competing in oligopolistic markets. Indeed, advertising even in mainstream economics is seen as related to what is called “monopolistic competition.”6


n a freely competitive capitalism dominated by mostly small family firms and competitive markets, such as those found in the United States through most of the nineteenth century, advertising played a much smaller role. What advertising existed at that time was primarily aimed at providing retail price and product information to prospective customers. Under these conditions there were innumerable firms competing in the economy and in each given market. Hence, the typical firm in this freely competitive economy was unable to exert significant control over price, output, or investment levels, which were imposed by the market as a whole. Price competition was the key form of competition, output was normally maximized, and the economic surplus generated within production tended to be automatically reinvested since investment outlets were not a problem.

This last quote could be interpreted by a proponent of free markets who is opposed to giant corporate structures that exist today to be a fact that should lead us to return to a more "small business oriented, competitive capitalism." Of course this opens up a whole new debate, and there are many consequences that go along with that. But in looking at advertising itself, it seems quite clear that advertising is quite opposed to market efficiency, and proponents of capitalism ought to support either high regulation of advertising or the banning of for profit advertising. Although this would require some sort of state intervention, which makes libertarians cringe, I wonder how they would get around this problem.

Thoughts?

[cyu]

it seems quite clear that advertising is quite opposed to market efficiency, and proponents of capitalism ought to support either high regulation of advertising or the banning of for profit advertising. Although this would require some sort of state intervention, which makes libertarians cringe, I wonder how they would get around this problem.

Excerpts from http://knol.google.com/k/j-y/equal-pay-for-unequal-work/gcybcajus7dp/6


Promote democracy in the workplace—employees are free to vote on a differentiated pay structure, if that’s what they want.
Now that workplace democracy is the norm, start promoting equal pay—this isn‘t to say you‘re forcing it on everyone—instead, it’s kind of like forming a new party in a new democracy, where this new party is promoting the concept of equal pay.
Replace product advertising with job advertising. Again, you‘re not forcing people to no longer advertise their products—you try to convince them instead. Point out the harm (psychological, environmental, etc) to society caused by product advertising versus the increased motivation as a result of job advertising. It’s like teaching gardeners to water their plants—you don‘t force them to water their plants, you‘re just telling them that watering their plants is a better idea than not watering their plants.
The Demotivation of External Rewards

There are plenty of psychological studies that show "rewarding" work results in people liking the work less, and focusing on only the reward as their goal:

There was an experiment documented in Elliot Aronson's The Social Animal - some people were divided into two groups. In one group, the people were paid to do a certain activity. In the other group, the people were not paid to do the activity, but instead the organizers emphasized things like how much fun the activity was. At the end of the experiment, the people who were paid were much less likely to have found the activity enjoyable and would only do it again if they were paid again. The others were more likely to do the activity again of their own accord.

http://www.alfiekohn.org/books/pbr.htm also documents how giving someone a "reward" for work ultimately results in the person liking the job less and only going after the reward.

There is also this from http://bookoutlines.pbwiki.com/Predictably-Irrational

Ariely then ran another experiment. He read from "Leaves of Grass," and then asked his students the following:

1/2 of the students were asked if they would be willing to pay Ariely $10 for a 10-minute poetry recitation

1/2 of the students were asked if they would be willing to listen to a 10-minute poetry recitation if Ariely paid them $10

The students who were asked if they were willing to pay offered $1 for a short reading, $2 for a medium reading, and $3 for a long reading.

The students who were asked if they'd accept pay demanded $1.30 for a short reading, $2.70 for a medium reading, and $4.80 for a long reading.

In today's system, you convince people to work by offering them money. You convince them to want money by advertising goods they can buy. Without product advertising, would people still want those goods (or money) as much? What then is the purpose of it all? To create a "desire" that wouldn't have existed otherwise, so you can fill that desire – it seems to me to just be a system of creating unnecessary work. Now before you make the argument that advertising isn't all that effective in getting people to buy what they don't want, consider this: why spend so much effort on advertising? It supports all of network television – million dollar salaries for the cast of Friends. Companies wouldn't spend so much if it didn't work. If advertising is just informative, then why spend all that money on slick ads? Why not just a simple, boring blurb about your product? The answer, of course, is that "boring" doesn't sell.

Replacing Product Advertising

So let's turn this around. Instead of trying to convince people to want things they don't want, instead convince them to want to do things that actually need doing. Seems like a much more direct method to me and a much better use of the skills of our great advertisers.

What makes me think this kind of advertising would work?

As long as the advertising is controlled democratically, then the electorate already knows how important these jobs are. Thus, they already have the motivation to get these things done. The only real question is, are they able to make these activities sound enjoyable. To that end, they just need to employ the same psychological tools that product advertisers have been honing for years.

I would imagine different people would give their support to many different organizations. Each of these organizations would be supporting advertising for different activities. The more people supporting one organization, the more advertising you'd see for the jobs supported by that organization.

[Lynx]

Would this include advertising for hobbies and sports? Problem-solving?

I like the idea of activity-based advertising. The focus is not on the product. Yet the relative merits of different products may affect the experience of an activity.

[cyu]

Would this include advertising for hobbies and sports? Problem-solving?


Sure, as long as people see value in doing something, they are free to support advertising for that kind of activity. Sports, for example, are good for people's health, and, in cases like swimming, can save lives. However, if some other activity could not only provide exercise, but also help out other people at the same time (for example, building a wheelchair accessible trail along a scenic mountain path), then I could easily see more people gravitating toward promoting that other activity.



I like the idea of activity-based advertising. The focus is not on the product.


I guess sometimes it could be a mixture - instead of running ads that say, "I want this product" - they could be ads that say, "I want to work on a version of this product that will go down in history" - or "I want to work with some of the most exciting people in this field" - or "I want to learn the intricacies and possibilities of this product design"

[Nwoye]

two things:

advertising (or lack thereof) can have a significant affect on market conditions and so forth. any time the two parties have differing information (one has more than the other) about a specific transaction then the result will be pareto inefficient market transactions. this means that if an advertiser promotes false or misleading information, or omits information, then the information held by both parties will be unequal. if this happens, market inefficiency (in terms of social benefit) will occur. you should google "information asymmetry"

also, it depends what you mean by "natural" demand. technically, if you characterize natural as whatever the consumers freely desire - even if that desire is peaked by advertising - then demand stimulated by advertising is natural. if you consider natural demand equal to the marginal utility or benefit to each consumer than advertising could be considered to create unnatural conditions, in that advertising does not increase the utility of a service or product. that being said, demand is never perfectly equal to marginal utility.

[KurtFF8]

Yes I'm aware of information asymmetry which I believe advertising (for profit) perpetuates.

And I put the word "natural" in quotes because I don't think there is a natural supply and demand point, but some market advocates talk about the abstract point which would lack something like information asymmetry, and my point is that advertising creates or perpetuates that asymmetry.

[cyu]

if you characterize natural as whatever the consumers freely desire - even if that desire is peaked by advertising - then demand stimulated by advertising is natural.
There's a difference between a biologist who goes to Africa only to learn about lions, and a biologist who learns about lions in order to apply that knowledge.

The difference is if you want to be an observer or a participant. Politics are obviously about participation - while the study of economics could be either one or the other.

Regardless of how you define "natural" in this case, the more important question is: Is desire that's peaked by advertising a good thing? Would society be better off with this kind of desire or worse off?

Economics is about the management of scarce goods and resources. If goods are scarce and you are actively promoting more desire for that good, then you are basically just going to be causing trouble within society - petty crime, robbery, embezzlement, bribery, "greed", etc - in order to get access to that scarce good.

[Nwoye]

There's a difference between a biologist who goes to Africa only to learn about lions, and a biologist who learns about lions in order to apply that knowledge.

The difference is if you want to be an observer or a participant. Politics are obviously about participation - while the study of economics could be either one or the other.

Regardless of how you define "natural" in this case, the more important question is: Is desire that's peaked by advertising a good thing? Would society be better off with this kind of desire or worse off?

Economics is about the management of scarce goods and resources. If goods are scarce and you are actively promoting more desire for that good, then you are basically just going to be causing trouble within society - petty crime, robbery, embezzlement, bribery, "greed", etc - in order to get access to that scarce good.

i agree with you really. my point was just that in mainstream economics demand being "unnatural" would probably refer to some form of government intervention, either through price or wage controls, sales taxes or stimulus proposals. but yeah i agree that modern advertising is a generally negative thing in terms of economic efficiency.

[Invariance]

Economics is about the management of scarce goods and resources. If goods are scarce and you are actively promoting more desire for that good, then you are basically just going to be causing trouble within society - petty crime, robbery, embezzlement, bribery, "greed", etc - in order to get access to that scarce good. What?

Firstly, your definition of economics is straight out of the textbook of the neoclassical/bourgeois school. It takes the market economy as given, ignores the roles of institutions and how economic systems and consumer behaviour change in an evolutionary way. It also betrays the static nature of neoclassical economics; to allocate what we have today rather than dynamic issues of output, growth etc that change over time.

Secondly, when firms advertise they are seeking to gain a larger niche over the market than they already have (or to create demand for a commodity which doesn't have a market yet). You have taken a bizarre line that since all goods are scarce that therefore by firms promoting their goods they are promoting crime and theft in order to get that good. Would you rather firms not advertise their goods, and everyone be on 'equal grounds' so as to not upset the special 'market equilibrium?' Sorry, that's nonsense. Firstly its nonsense because there's no such thing as market equilibrium and hence no such thing as market efficiency and the OP would be well advised to drop all the assumptions regarding supply and demand, perfect competition etc. All firms attempt to act like monopolies, and are restricted, not by marginal productivity, but by the ability to sell as much as they want, hence advertising costs, and hence restricted by financing. Even if firms didn't advertise, and consumers had complete information, and all firms were price takers, monopolies can arise via transport advantages, location, and the fact that all commodities and consumers tastes aren't homogeneous...


So let's turn this around. Instead of trying to convince people to want things they don't want, instead convince them to want to do things that actually need doing. Seems like a much more direct method to me and a much better use of the skills of our great advertisers.


Is desire that's peaked by advertising a good thing? Would society be better off with this kind of desire or worse off?

What does advertising in a post-capitalist society have to do with the OP's questions? And who cares where desires come from - who are you to judge what some find desirable and some not? Sure, if society only produced those goods which met the 'needs of people', we might be better off. But that's not a revelation at all, and has little to do with advertising, but with capitalism itself which aims at producing for the sake of surplus value, for the sake of accumulating and accumulating.

[cyu]

in mainstream economics demand being "unnatural" would probably refer to some form of government intervention, either through price or wage controls, sales taxes or stimulus proposals.

I would say it depends on who controls what you call the "government" - for example, if employees ran a company democratically, can they be considered the "government" of that company? If so, "government" control of wages within the company is no more unnatural that the authoritarian "government" wage controls in capitalist run companies.

In terms of "stimulus" - who decides what to stimulate? If the decision were truly democratic, then in fact, the demand is not unnatural - since the demand is determined by the electorate, as long as the electorate includes everyone, then the result of the vote would be a natural reflection of what they want.

[cyu]

Would you rather firms not advertise their goods, and everyone be on 'equal grounds' so as to not upset the special 'market equilibrium?'

Yes, I would rather see firms not advertise their products, but not because I want to support your so-called equilibrium. Why do you want firms to advertise their products anyway? If you read the posts above, you'd see I want firms to replace their product advertising with advertising for the jobs available in the firms.


And who cares where desires come from - who are you to judge what some find desirable and some not?

I'm not going to judge - I'd leave it to the electorate to judge. From above:

"I would imagine different people would give their support to many different organizations. Each of these organizations would be supporting advertising for different activities. The more people supporting one organization, the more advertising you'd see for the jobs supported by that organization."


capitalism itself which aims at producing for the sake of surplus value, for the sake of accumulating and accumulating.

I would say the capitalist market produces for the sake of those with the most spending power. Each unit of currency spent is a vote for how to allocate resources for production. If the gap between rich and poor is very wide, then the proportion of resources allocated for serving the rich is very bloated.

[Nwoye]

I would say it depends on who controls what you call the "government" - for example, if employees ran a company democratically, can they be considered the "government" of that company? If so, "government" control of wages within the company is no more unnatural that the authoritarian "government" wage controls in capitalist run companies.

In terms of "stimulus" - who decides what to stimulate? If the decision were truly democratic, then in fact, the demand is not unnatural - since the demand is determined by the electorate, as long as the electorate includes everyone, then the result of the vote would be a natural reflection of what they want.

to be perfectly honest this response has nothing to do with what i was talking about.