50: New! Improved!
Better market information through advertising
The problem: customers need information
In a world of complexity, change and uncertainty, how do entrepreneurs communicate with potential customers about their innovative products and services?
The idea: scrap regulations on advertising
If governments scrap pointless regulations, producers can use advertising as a tool with which to compete. Unless consumers' attention is not drawn to an innovative product there will be no demand for it, and no prospect of the producer enterprise growing and contributing to the economy.In modern, complex societies, advertising is a means of alerting consumer to what they do not know that they do not know.
The results: advertising boosts choice
Where advertising bans have been removed, consumers have benefitted from the increased availability of higher-quality goods and services, lower prices and greater choice. Suppliers have also found it more worthwhile to commit resources to improving products because advertising gives them the confidence to invest in innovation.
If it is successful in drawing consumers into trying out new products, advertising accelerates the speed at which an improved service or good becomes widely used, and threfore the speed with which a good idea is translated into business success. So the payback time for the original investment is shortened, cutting the costs of production.
Advertising also encourages innovation by helping to overcome barriers to market entry. New entrants, whose name and products might be unfamiliar, can make themselves better known through advertising and thus enter a market, even one dominated by one or two big names.
A good example of the benefits arising from advertising is the removal in 1984 of the previous advertising ban on opticians in the United Kingdom. Suddenly, opticians were able to promote their range of products, new suppliers were able to penetrate a previously restricted market, and customers have been able to compare prices and offerings and shop around more confidently.
The abolition of the rule against opticians' advertising led them to refurbish their premises, stock a much wider choice of spectacles and offer an enhanced level of service. New cut-price chains such as Vision Express and Specsavers entered the market, located in prominent high-street locations. Prices have dropped, choice has increased, shops have become less like doctors' surgeries and more like state-of-the-art retail stores, and more people are buying more eyeglasses. Customers are now able to pick up ready-made reading glasses for a few pounds, and can take advantage of offers such as 'buy a pair of glasses from us and get a pair of prescription sunglasses for free'.
At the other end of the spectrum, state-owned monopolies tend not to advertise, because they have no need to: they operate in a protected market. Such markets are characterized by lack of innovation, high prices and rationing. The telecoms market in the UK before prior to liberalization and privatization is a classic example. The telephone monopoly hardly advertised. Today, its successor, British Telecom, is one of the biggest advertisers in Europe. Equally, though, advertising has been a key instrument by which new entrants have been able to compete in the telecoms market: and many of these new suppliers, such as those providing mobile phone services and equipment, have become familiar large-scale advertisers both in the UK and in other liberalized markets.
The new competition which advertising has made possible means that telecoms users have benefitted from lower prices, improved quality and a wider range of innovative features such as mobile telephony, text messaging, caller identification and call-back. In mobile telephony, Orange, a new entrant, employed advertising to promote its per-second billing offer which proved so successful that its rivals - who charged per-minute even if only a few seconds had been used - were obliged to match it.
In the former Communist bloc, advertising has been used to support the entry of new players into the market. In Poland, for example, the new freedom to advertise has underpinned the launch of a wide range of new goods and services. It has also led to an explosion in different newspaper and magazine titles as well as a whole new array of television channels. Companies can now register their brands which gives them confidence to invest in innovative products.
Assessment: the benefits of deregulation
Advertising offers a way of making technical improvements relevant and attractive to the consumer, by translating sometimes complex product features into a readily understood consumer benefit. This is clearly demonstrated by car advertising where many innovative improvements would remain invisible to non-experts if they were not brought to public attention through advertising, because they are hidden away inside the car and its engine.
Competition, made all the more intense by advertising, has forced firms to rebalance charges, aligning them to reflect more accurately the actual cost of providing a specific service. Otherwise, new entrants can come in and exploit niche markets where higher prices prevail, bringing themselves to public attention through advertising. The rapid development of the telecoms market in the UK since the 1980s is a good example of this trend in practice.
No amount of advertising can consistently sell a flawed product, as demonstrated by the launch of Persil Power by Lever Brothers in 1994, a washing powder whose 'biological action' led to some customers complaining about mild allergic reactions on the skin; or Coca-Cola's new formula, which many people found less palatable. In each case, the manufacturers were forced to revive and rebrand the 'Original' or 'Classic' versions.
Advertising is used to highlight distinctive qualities and innovative features. In turn, this acts as a catalyst for accelerating revenue returns based on the uniqueness of that offering. From the customers' point of view, this is a virtuous circle, since customers are the principal beneficiaries of all this pressure to innovate and compete.
Similarly, it is important to ensure that advertising is honest and truthful. This can be done by setting up a national standards body - though it makes sense for this to be run as an industry body, rather than be an arm of government run by the bureaucrats.
For further information:
- For an academic study of the role of advertising, see Kirzner, Israel (1997) How Markets Work: Disequilibrium, Entrepeneurship and Discovery: Institute of Economic Affairs (London).
- Kirzner, Israel (1973) Competition and Entrepreneurship, University of Chicago Press.
- Boyfield, Keith (1999) The Effect oƒ Advertising on Innovation, Quality and Consumer Choice: UK Advertising Association Economic Committee.
- The World Advertising Research Center provides a host of case studies at its subscription website www.warc.com.
- For a view from the International Advertising Association see www.iaaglobal.org/iaagenerator.
Copyright 2002: Adam Smith Institute
Created and Maintained by: Cyberpoint Limited