Bryan Caplan  

Advertising: What Is Not Seen

Harford Book Forum at Marginal... Boudreaux vs. Macro...

Here's a gem from the first article in Henderson's Concise Encyclopedia of Economics:

The rise of the self-service store, for example, was aided by consumer knowledge of branded goods. Before the advent of advertising, customers relied on knowledgeable shopkeepers in selecting products, which often were unbranded. Today, consumer familiarity with branded products is one factor that makes it possible for far fewer retail employees to serve the same number of customers.
When I read this, I had to admit: "I've never thought of this." In a world without advertising, how would you know what to buy? The blessings of Big Box stores would be beyond our reach.

This is particularly striking to me, because I can't stand advertising, and have managed to isolate myself from most of it. And yet, I benefit immensely from its existence, because I free ride on other consumers' knowledge. People who watch commercials give me advice about what to buy - and make self-service retail feasible. They drive me crazy, but thanks!

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COMMENTS (13 to date)
Buzzcut writes:

Hmm. The most striking thing to me about the big box stores is how many unknown Chinese brands they sell.

I mean, who is going to drop a grand on an "Oliva" plasma tv? They don't advertise. You don't know them from Adam.

Maybe you can go to a revewing web site and see what other people think of the thing, but is that all that different from the knowledgable salesperson?

liberty writes:

I am surprised that you have not considered the benefits of advertising before. As with the rest of profit-maximizing activity, it has a purpose wrt competition. It gets the word out, it offers consumers knowledge about their choices, it forces competitors to offer at least as good a product for an equivalent price by letting the consumer know about differentiation and price, etc.

Its funny because one of the promises of socialism was going to be to "get rid of the need for advertising" which was seen as another "wasteful part of capitalism" just like the middleman* but in the end, the Soviet government ended up doing more advertising than the private sector would have done-- not just propaganda but honest advertising for the state-made products!

* As you know, middlemen are also not the waste they were perceived to be.

Felix writes:

Another overlooked requirement of self-service stores is customer honesty. And, the assumption of customer honesty on the part of the storekeeper.

ZW writes:

Of course, the downside is Big Box stores that are so big they require employees just to help one find those items for which one is looking.

John Thacker writes:

I mean, who is going to drop a grand on an "Oliva" plasma tv? They don't advertise. You don't know them from Adam.

The plasma tv company "Olevia" certainly does advertise. They've been all over the ESPN/ABC family of networks, as this search will show you. Perhaps you don't watch ESPN all that much, but they came from a company nobody ever heard of to an incredibly fast growing one thanks to advertising.

Dog of Justice writes:

Of course, the downside is Big Box stores that are so big they require employees just to help one find those items for which one is looking.

It's about time for stores of reasonable size to provide terminals with search interfaces to help customers find stuff. So far I've only seen bookstores offer this service.

Palak writes:

I think advertising has its advantages as well as its disadvantages.

It's definetely an advantage for companies to get the word out. However, it's also an advantage for consumers. With advertising, consumers can learn about a product and compare it to others and make a choice on which they think is best. Without advertising, all they would see are the products at the store and would purchase something based on appearance only.

One commonly used form of advertising is television commercials. When consumers see a product being advertised on tv, it shows them that the company has enough money to advertise on television, which shows high quality in the company. This alone can help consumers choose the best product in the market.

As for the disadvantages, I agree with you when you say that sometimes you feel like they're giving you advice on what to buy. That can definetely get kind of annoying. Also, some advertisements can be long and boring.

In my book, advantages cancel out the disadvantages. I'm all for advertising! :)

Mark Seecof writes:

That's nonsense. In a big box store you can still trust the shopkeeper to select goods for you: look at Costco. Everything they sell is of good quality. Furthermore, if you were dissatisfied with the goods you got at one establishment you would patronize another-- competition would prop up quality (at each price-level or shopper class; compare Target and Walmart).

No, big-box stores have risen because of several factors other than the spread of advertising- related brand awareness: (a) consumers have better transportation (automobiles) and more room at home (housing sq-ft/person has been rising steadily for decades) to store goods between shopping trips (big box stores are a natural side effect of the suburban lifestyle); (b) big box stores exploit capital improvements like wireless price guns to use labor more efficiently, enabling them to charge lower prices; (c) big box stores use information technology to achieve economies of scale too complex for more manual systems to support.

Anyway, you have perhaps heard of George Washington Hill? If advertising were the key enabler of big-box stores Americans would have been shopping in them before World War I.

(Now, if you argued that brand awareness and trust were key to Internet shopping, I might think you were right!)

sourcreamus writes:

Advertising and branding are two different things. In theory advertising should tell you about a product's comparitive advantage, but they don't. Every product tells you it has the best quality and value. The only way to find out which brands actually deliver is to try them yourself or trust someone who has. Once you have made a choice as to what you like, then branding lets you make that choice over and over.
I am grateful for advertising because it make entertainment media so much cheaper.

George writes:

I'd like to comment both on this post and your other from the Nov. 2005 archive. I generally have the same dislike and sometimes disgust for advertising in general. Yet, I am so fascinated by it. My reasons for dislike are that I tend to feel insulted by the whole process, a la the commercial that instills an annoying jingle in my head or has no perceived relation to the actual product being sold. However as a student of human behavior I am intrigued by its general effectiveness. In the early days of the internet I remember thinking, "finally a moderately commercial free source for information". Oh well.

Movies theaters used to show previews but now I'm inundated by Coke commercials, T.V. commercials, etc. So economically speaking how much we respond to these ads eg purchasing the products tells these companies that their "Advertising Elasticity" is quite high and they continue to proliferate.

I've adopted many of your ideas for eliminating this annoyance in my life. Here's an additional strategy. Instead of T.V, radio, movies, GPS, Ipods, etc let's try reading or maybe talking to each other. It's incredibly liberating.

Michelle writes:

I agree that advertising advantages outweigh its disadvantages. Advertising is a huge business and a lot of money can be made in the advertising industry. This industry creates thousands of jobs for people every year. I believe that advertising is a major contributor to the economy. It lets us know what products are available, new movies that are coming out, etc. How many people would probably pay to see a new movie without seeing any of the previews beforehand? Commercials are extremely biased, but they can be very informative if you listen carefully. I can watch a commercial and have a pretty good idea on if a product is junk or something of high quality. Commercials give consumers different options when it comes to buying a product. It also has a big impact on competition, which can stimulate the economy. Advertising forces companies to develop better products at a competitive price. Millions of dollars are put into the economy every year to promote this industry. Advertising helps support magazines, newspapers, etc.
Without advertising, the economy and consumers would suffer. The economy wouldn't have the extra cash flow because advertising creates a lot of business. People see "cool" things on the t.v. all the time that they just have to have, and if there hadn't been a commercial for it, they probably never would have bought it to begin with. Consumer would also suffer because they wouldn't be informed on the different products that are available and thousands of people would be without a job. Advertising creates a demand for products, which will ultimately affect the supply and the price of the product. If there isn't a large enough demand to keep companies going, the economy would fall apart. There are always advantages and disadvantages with every idea or product, but I believe that advertising creates a lot of benefits for people and the economy.

Jarrod Coomer writes:

The interesting thing about advertising is the effect it has on the customer's viewpoint concerning costs. Is it just me, or do nearly all commercials and other forms of advertising really get the potential customer thinking more of intrinsic costs than extrinsic costs? Just take a look at the new Visa slogan..."Life takes Visa". Nothing is mentioned in the ad concerning the extrinsic costs of using the card. It just leaves the viewer with the idea (whether they believe it or not) that carrying the card will result in an increased amount of happiness. Just think how many advertisements we see that relay no valuable information concerning the quality, cost, or performance of the advertised product. I pose another rhetorical can several different products really be #1 (got to love independent studies). What's really interesting is how successful these ad campaigns end up being.

Now, back to the topic at hand...when in small stores or specialty stores, I rely on the advice of the store employee. When shopping at both small stores and big box stores I rely on spec sheets and customer reviews before making a high dollar purchase. Thanks so much for customer reviews!!! As a former employee of Wal-Mart while in high school, I don't make my purchasing decisions based upon the input from just any associate at a big box store. More often than not, the associate's stance is determined by customers relaying their stories of bad experiences with certain products.

T Carrington writes:

It can be reasonably assured that advertising plays a huge part in sales of products and services. As the article in Henderson’s Concise Encyclopedia of Economics mentions, “Before the advent of advertising, customers relied on knowledgeable shopkeepers in selecting products.” However, knowledgeable shopkeepers can actually be viewed as personal advertisers.

Advertising is accomplished in many different forms and fashions. There are verbal and nonverbal advertisements: radios, television commercials, magazines and billboards, etc. A general definition of “advertise” is to make a public announcement in order to increase consumer awareness of goods and/or services and thus increase sales of the goods and/or services.

In the past, it seems that the act of advertising was simply more subtle and expressed at the time that consumers entered the shopkeeper’s store. Due to the fact that many goods in the past were unbranded, I am sure that shopkeepers were inclined to encourage consumers to purchase the goods that they had in excess quantities or even goods by which they were under “contract” with particular suppliers. Thus, this past act clearly resembles what became known as advertisement.

The advent of branding products seems to have brought about more observant forms of advertising. Consumers are flooded with hundreds of advertisements in a given week. Driving down the road you see billboards and/or you may listen to the radio. Walking down the street you see posters and/or you may encounter a “sampler”. Sitting at home you may read an advertisement within a magazine, and/or view a commercial. In almost any given situation, a consumer will stumble across an advertisement.

It is pretty safe to say that practically every good and/or service is branded. Advertisement of these brands entices consumers to go out and purchase these particular goods and/or services. Self-service stores have flourished because of consumer knowledge of branded goods. It may appear that consumers no longer need the “shopkeeper” or retail employees to serve them but it is only because the service that was once “advertised” in person is now done through the media.

Today, advertisement of goods and/or services is very essential because most retail employees have very little knowledge of the goods and/or services that they are selling. I am sure that one of the popular ways that retail employees learn about the goods and/or services that they are selling is from advertisements.

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