Is Advertising Good or Bad?

[Edit: If you're looking for a less academic and more impassioned view on advertising, check out my more recent post, Advertising, the Fallacy of Perfectibility, and the Best Minds of My Generation.]

Josh's curmudgeonly comment on yesterday's post reminded me of my grandfather saying that advertising is just "a way to convince people to buy things they don't need." This theory of the purpose of advertising is called by economists the persuasive view.

The persuasive view is that advertising changes your preferences in ways not grounded in the actual good being sold. This makes demand more inelastic to price, resulting in higher prices. And since the product differentiation created by advertising is often spurious, you buy one thing when something else--or nothing at all--might have been better. The persuasive view holds that advertising is bad. This is probably the oldest theory of advertising and the most widely held among both economists and non-economists. (I like Kaldor on this view, but Marshall, Chamberlin, Pigou all weighed in.)

The Chicago School, not surprisingly, disagrees. Their view is that advertising is informative: "search costs"--the cost of finding the product that fits your needs--lead to market inefficiencies. If you don't know about better products you can't buy them, so advertisers are doing you a service by letting you know about their products. Advertising is the most efficient way to minimize search costs. Advertising is good. (Stigler is the economist I associate most closely with the informative view.)

Another idea is that advertising is complementary to the product being advertised: Apple has created an image that makes it worthwhile to be seen in the Williamsburg coffee house with a MacBook, not a Dell. This is a component of most luxury goods marketing. Advertising can be either good or bad in the complementary view: you get more from the product but it also costs more, and the net goodness or badness depends on the size of these two effects.

I'm also going to break out another view, because it's not clear to me that it should be considered either part of the informative view or the persuasive view. It's long been believed by economists that companies use advertising as a way of signalling quality: any company spending a ton of money on a Superbowl ad can't be selling schlock (this is akin to the wood paneling in a lawyer's office, or the Persian rug in a banker's office.) If the signalling is of an infomative nature, then it is good. If it is of a persuasive nature, then it is bad. Brand ads are typically persuasive, but could be viewed as informative in their signalling. Kids toy ads, on the other hand, pretend to be informative but are actually using false signalling to be persuasive (false because the quality of kids' toys tends to be inversely proportional to the amount of advertising.)

While the economists can argue over whose view is right, it's pretty clear that ads fall into each of these categories--and often several categories--depending on the product, the audience, the advertiser, the media, etc. Treating marketing as a single thing leads to flawed reasoning.

For instance, when people say that behavioral targeting is "good" because it puts more relevant ads in front of you, they ignore that relevant ads only make your life better when they are informative; when they are persuasive they make your life worse. BT amplifies the societal impact that an ad already has, so trying to (or needing to) justify it on the basis of consumer benefit is meaningless (and a way of escaping the real question: privacy concerns; when in doubt, change the subject.)

If advertising is differentiated in how it affects our well-being, then the question of whether it's good or bad changes. I believe that the best way to build a business is to somehow make your customers' lives better, so the question I'd love to see more startups answering is: how do we increase the good/informative and decrease the bad/persuasive nature of advertising?