The Effects of Advertising

I’m at Logan airport, ready to head back to Duke for my senior year. I’ve been mostly MIA the past two weeks, taking a break after my internship at the Washington Monthly to reboot myself and prepare not just for the upcoming semester, but for all the political chaos surely upcoming as well.

But while I’m at it, I’ll toss in some policy as well: at some airports, I use my Verizon 3G wireless card to access the internet. Not at Logan. It offers free wifi in return for watching a short 15 second advertisement. That sounds like a great deal to me. I didn’t even watch the ad. I was getting my headphones out as it played and when I looked up again, I was connected.

Now, I’m not sure the financials behind the deal but I presume the advertising companies are paying for most of the internet and in return, Logan requires users to watch their ads. I haven’t done any research on how advertisements effect me – I like to thing I ignore them and make rational choices – but those companies have. They have loads of research on the value of advertising and would not have made the deal with Logan unless those ads work. And if they work, then they are distorting users choices. Now, this could be good or bad.

Economic theory stipulates that a rational consumer will always make the optimal, efficient purchase. They have complete knowledge of the product, the competitors’ products and prices. But most of us aren’t rational consumers in that sense. We don’t necessarily research every purchase thoroughly. We don’t check competitors’ prices for most purchases. We just don’t have the time. So maybe the advertiser is helping us out. Maybe it really does have the superior product and its ad is just saving us the research.

But the opposite can also be true: maybe the advertiser is selling the inferior product and “deceives” the consumer into purchasing it (deceives them by distorting the relevant information). Clearly, there is an economic loss here.

But is it offset by the economic benefits of ads from advertisers’ with superior products? If so, then consumers win here. Because if the net costs and benefits are zero, then all that is left is the ad revenue that often goes towards consumers (such as internet in the airport).

And beyond that, companies’ eagerness to spend money on ads does not tell us anything about the net effects of them. In an extreme example, perhaps consumers always purchase an inferior product so companies with the superior product are desperate to advertise their products everywhere. In this situation, those ads help consumers. And, those companies see great net benefit in advertising. So who are the losers here? Well, those companies’ with the inferior products. This is a situation where the more advertising, the better. The fact that the companies’ see a net benefit to advertising is meaningless

What matters is the distortion of those ads: does it lead consumers to make more efficient, economical purchases or not? What about when you include the economic benefits of the ad revenue?

These are important questions as advertisements become more and more prevalent in our day to day lives. For instance, New York City recently announced that it will sell advertisements on metro cards. At first blush, this seems like a great idea. It offers more revenue for the Metro Transit Authority to improve the train. But maybe the ads distort consumers’ choices in a negative manner. If that’s the case, then it isn’t necessarily a great idea. It depends on the benefits those consumers’ receive from the improved metro.

All of this is to say that we don’t fully know. I’m going to go through more research during the next couple of weeks and see what I can find, but it’s important to keep in mind that ads aren’t just annoying (another negative effect that I didn’t mention), they are also an important economic factor in our society.


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