The Economic, Social, and Regulatory Aspects of

Advertising

Chapter 02

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

• LO1: Describe advertising’s impact on the economy.• LO2: Examine the validity of various social criticisms of

advertising.• LO3: Explain differences between social responsibility & ethics

in advertising.• LO4: Describe how government agencies regulate advertising to

protect both consumers & competitors.• LO5: Discuss the activities of nongovernment organizations in

fighting fraudulent & deceptive advertising.

2-2

Corn Flakes & Michael Phelps

• Issue: Phelps was photographed engaging in an illegal activity

– Some Companies rescinded sponsorships others did not.

– Which companies did the right thing?

2-3

Issues in Advertising

• Many Controversies about Advertising– Advertising is a highly visible

activity.

– Companies risk public criticism & attack if their advertising is offensive or the products don’t measure up.

2-4

The Economic Impact of Advertising

• Advertising accounts for 2% of the US’s GDP– The level of advertising investment in a country is

directly proportional to its standard of living.*

• Advertising sets up a chain reaction of economic events– The effect is like a break

shot in billiards: hard to predict, affecting many.

2-5

The Effect on the Value of Products

• Advertising gives brands added value• Advertising creates associations that

help consumers satisfy needs & wants• FTC/Supreme Court: Advertising

increases competition & helps lower prices

• Advertising can stimulate demand• Advertising doesn’t restrict competition

2-6

The Effect on Prices

• Important points on advertising costs & pricing– Advertising is a small part of a product’s cost.– Advertising enables mass-production, which lowers the cost

per unit of products.– Regulated industries see no price increase associated with

advertising. When deregulated, advertising often causes lower prices.

– In retail, advertising contributes to both higher & lower prices.

2-7

The Effect onConsumers & Businesses

– Primary Demand for a product category

– Secondary Demandfor a specific brand

2-8

The Social Impact of Advertising

• Advertising is visible & gets criticized frequently– Is advertising deceptive and/or manipulative?– Does advertising degrade our value system?– Is there too much Advertising?– Does advertising propagate stereotypes?– Is some advertising unnecessarily offensive?

2-9

Social Responsibility & Advertising Ethics

• Where laws and regulation end, ethics begin– Ethical Advertising means doing what the

advertiser and advertiser’s peers believe is right– Social Responsibility means doing what society

views as best for the welfare of the people or specific community

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U.S. Regulatory Advertising Issues

• Freedom of Commercial Speech– Commercial speech is protected.

• The Tobacco Industry• Advertising to Children– Advertising should not intentionally deceive children.

• Consumer Privacy– Increased interactive advertising has made this a

growing consumer concern.2-11

Federal Regulationof the Advertising Industry

• Many government agencies protect consumers– FTC (Federal Trade Commission)– FCC (Federal Communications Commission)– ATF (Bureau of Alcohol, Tobacco, and Firearms)– USPS (US Postal Service)– FDA (Food & Drug Administration)– LOC (Library of Congress)– US Patent and Trademark Office

• Many state & local governments also regulate

2-12

State & Local Regulationof the Advertising Industry

• All states have “little FTC acts” – State legislation for advertising is often based on the

truth-in-advertising statute developed by Printer’s Ink.– Any maker of an ad found to contain “untrue, deceptive, or misleading”

material is guilty of a misdemeanor.

– Often states work together to investigate & prosecute violations

– Many localities also have consumer protection agencies.

2-13

Nongovernment Regulation

• The Better Business Bureau (BBB)• Media Regulation• The National Advertising Review Council (NARC)• Consumer Advocate Groups• Self-Regulation

2-14

International Advertising Regulation

– Foreign Governments often regulate differently than the United States

– Most countries are more restrictive

– Different countries have different legal environments

2-15