Businesses try their best NOT to compete on price.
May 25th, 2009 | Published in Economics idea | 12 Comments
The main goal of businesses is to maximize total profits. The higher a business can keep its profit margins without decreasing sales, the more profits it earns.
In many situations, consumers don’t think much about prices. So long as the price of a good isn’t exorbitant, they make their choice based on other criteria. For example, people often buy brand name products even when a cheaper generic product is available. They know they like the brand they are used to and don’t want to risk having problems trying something new.
The goal of marketers is to figure out how people make their purchasing decisions and to manipulate them to buy the business’s product without worrying overly much about price. Marketers are good at their jobs. While price is important, it is usually not a decisive factor in people’s decision making process.
Economists don’t talk much about marketing. If marketing weakens competition, does it hurt the efficiency of markets? Are there macroeconomic consequences?
May 25th, 2009 at 9:50 am (#)
There actually is a school of economists who believe exactly what you describe, that marketing and advertising are forms of rent-seeking and thus monopolistic.
I don’t buy it. I’m of the camp that believes that marketing and advertising are a form of competition; that they are mechanisms through which firms reduce the cost of consumers finding out about sales and new products and such. I admit that it is difficult to quantify either argument, however, but that’s how it goes in the social sciences
May 25th, 2009 at 11:00 am (#)
Adam.
I agree that it is difficult to prove whether advertising and marketing are forms of competition or rent-seeking. I made my mind up based on the low information content of ads. They usually contain very little factual information. Also, the fact that ads are repeated so many times shows that their purpose is more than just providing consumers with useful information. Are my arguments conclusive? No. I, however, am persuaded to see them as primarily a tool for creating partial monopolies.
May 25th, 2009 at 1:32 pm (#)
I will easily provide you the flip-side to both of those characteristics, sir.
First, most consumers probably don’t want all that much information. If ads provided them with a lot of information, they would 1) not be able to verify how much of it was true and 2) have to go through much more of an effort to parse it all. Ads at most make consumers aware that some product/brand/event exists that they weren’t aware of previously, minimizing the cost of figuring out what alternatives they have available to them.
Similarly, the repetition goes to the fact that 1) they might not have gotten the consumer’s attention the first time and 2) the more people see the ads the more likely they are to actually remember the product/brand/event when the time comes that they are actually making relevant decisions.
In my mind, what competition does is make it possible for people to do more with less and less information. So long as people are aware that brand names exist, the producers can invest in the reputation of those brand names over time. I don’t want to waste my time listening to an ad that lists a bunch of facts that producers felt were relevant about their own products. Especially in this day and age, I can get reviews online from people who aren’t being paid by the producers themselves, if more information is what I want to get. All ads need to do is bring a brand out of obscurity.
For instance, I personally almost never click on any ads online. But I spend a lot of time in gmail because of its chat function, and recently a sponsored link appeared for this book which I found very interesting. I haven’t bought the book but I do intend to at some point; I wouldn’t even have been aware of it without the link. The link itself said very little information, other than the title and a little noninformative blurb. But it was enough to catch my eye.
Was it manipulating me? Only if you consider drawing my attention to something I wouldnt have otherwise known about but definitely would have been interested in “manipulation”.
May 25th, 2009 at 1:59 pm (#)
I agree that advertising serves a purpose by publicizing new products. However, if the purpose of ads were only to raise awareness of a product, I’d think Coke could stop advertising and save a bundle. Everyone knows about Coke. If you came from Mars and had never heard of it, you would discover it on your first trip to any supermarket or convenience store. It is impossible to argue that Coke pays for advertising to make people aware of its product.
I agree that repetition could be interpreted as necessary in case people miss an ad the first time. However, if repetition is being used to keep a brand at the top of my mind, I see that as manipulation. Advertisers are trying to short circuit my decision making process by having their brand pop off the top of my memory before their competitors brands do.
Your reputation point is sound. If a business is going to support a brand for the long haul, you can have more confidence buying it. It’s costly for them to mess up. What I don’t understand is how advertising is connected to reputation.
I agree that I wouldn’t believe facts presented by advertisers. I think third party reviews are the way to go. What I would like would be to have access to high quality third party evaluations of products when I want to see it. The book ad may have caught your attention. But think of the number of misses you had to endure to get one good recommendation. The cost is high.
May 25th, 2009 at 2:49 pm (#)
The Coke issue is interesting, and I don’t have a pat answer for you. I think it also goes to the issue of celebrity endorsements; who really thinks that a celebrity has a more valuable opinion than just anyone’s about a particular product, and it costs an enormous amount more to get them to show things. Part of that is just the fact that they’re more likely to draw attention, of course. But part of it also sends a signal about how solid a particular company is doing right now. if they’re doing well enough to afford Michael Jordon, they must be doing quite well. Similarly, Coke might be signaling its continued prosperity as much as anything, but that’s purely conjecture.
Advertisers are trying to short circuit my decision making process by having their brand pop off the top of my memory before their competitors brands do.
I mean just because you remember them doesn’t mean you’re going to want to buy them. To be honest, when I get those damn annoying jingles stuck in my head, it makes me want to boycott whatever the product is, just for subjecting me to their irritating marketing strategies.
What I don’t understand is how advertising is connected to reputation.
Advertising is just the sort of awareness side of building a brand. The reputation for quality is something that has to come through less direct, more long-term channels that are more difficult to approach and even harder to quantify.
What I would like would be to have access to high quality third party evaluations of products when I want to see it.
I’m not sure why you don’t have access to that sort of thing; most of the places where I find out about new products, and get good information on them, are third-party. The blogs I read, the friends who point things out to me, Amazon reviews, etc.
The book ad may have caught your attention. But think of the number of misses you had to endure to get one good recommendation. The cost is high.
Not really. This is Google adsense we’re talking about; it’s a little line of text. I ignore more than 99% of what shows up there. The only times I’ve clicked it has been because the things looked interesting enough to merit it; I’ve never clicked and been disappointed in what was on the other side. more to the point, I’ve yet to actually buy anything that I clicked through to, so it’s really cost me next to nothing on the whole.
And I’m not saying I enjoy advertisements. I use Adblock Plus with Firefox, and in addition use a special Greasemonkey script to remove all ads in Facebook. I have very little patience for ads, but I don’t think they’re rent-seeking.
May 25th, 2009 at 3:58 pm (#)
Adam
The lengths you go to to avoid advertising I think is the strongest indicator that ads aren’t being useful. If ads were providing you with useful information about new products, you’d find them interesting to read.
I agree with some of your points and believe that ads might not be entirely evil. I, personally, have a hate on for them. I do, in fact, use third party reviews. I just wish businesses would trust me to go do the research when it matters and leave me alone.
Just out of curiosity, what do you think of telemarketing? Companies pay for it, so it must increase sales. Can you defend it as not being manipulative?
May 25th, 2009 at 4:11 pm (#)
Again I don’t really see it as manipulation. Here’s my take:
Let’s say you have 10 people, 1 of whom would be interested in a product. From a firm’s perspective, they have very few tools for figuring out which of those 10 that 1 is–especially for pre-internet technologies like broadcast commercials and automated calling for telemarketers. And they have little incentive to not bother the 9; they want to just spread their message as wide as possible. So most of the time we end up being the 9 who don’t care but have our time wasted vs. the 1 who finds some value in it. So I don’t think they are without value, but I don’t care for them.
The main reason I block them online isn’t just out of distaste–I mean the more intrusive the are the more annoying it is, obviously. But on the internet they actually use bandwidth and processor power that I don’t feel like wasting, especially the big flash ads that Adblock Plus specifically targets.
I feel the same way about telemarketing that I do about spam; it’s taking advantage of a communications set-up that makes it more costly to avoid incoming messages than to send them. I think if phone companies offered subscriptions to big lists of known telemarketing offendors to block, much as we have spam filters for e-mail, they’d find people were willing to pay money to have them blocked.
May 25th, 2009 at 6:40 pm (#)
Adam.
I like the point you make that the asymmetric costs are a problem. It is almost costless to spam, yet it takes effort to effectively block them. In economic terms, there is a negative externality problem. Suppose spammers sell to 1 person in 10,000. They don’t have to pay much for the 9,999 people they bother. This screams market failure to me. Either spammers need to be taxed to incorporate the negative externality or they should just plain be banned. I don’t even need to resort to my “they are manipulating me” argument.
As to manipulation, consider the newspapers that use telemarketers to try to get subscriptions. It’s hard to argue that they are making things easier for people who want to subscribe. The number to call is printed prominently in every edition of the paper, usually on page 1 or 2 where it is easy to find. The only reason they are calling is because they think they can convince people to subscribe who weren’t intending to do so on their own. I see that as manipulation.
May 25th, 2009 at 6:51 pm (#)
You should know that I don’t believe in market failure (in the other direction, I don’t believe in “perfect competition” either; I don’t want you to think this is just coming from a free market idealogue perspective. I just like to think of things in terms of the incentives they create, and when they’re problematic I see them as a challenge rather than the failure of some abstract thing called the market). But yeah, the incentives that spammers face certain fall into the category of a negative externality, especially considering the fact that spammers only need a response rate of 0.00001% to make money.
The only reason they are calling is because they think they can convince people to subscribe who weren’t intending to do so on their own. I see that as manipulation.
I mean, I’m here, disagreeing with you and making a case for a different interpretation. Is that manipulation? I don’t really view attempts to persuade people to do something as all that nefarious; especially when it’s clear to anyone that the person is being paid to try (and so whatever they say should be taken with a big grain of salt).
May 25th, 2009 at 7:02 pm (#)
Adam.
I think you have a point. Manipulation is perhaps too strong a word. I think my dislike of advertising and telemarketers is spilling over into language that is perhaps too strong. Persuasion and manipulation have essentially the same meaning. The first has a better connotation though.
If marketing is about persuasion, maybe it’s okay. I still don’t like it, though.
May 25th, 2009 at 7:13 pm (#)
Hahaha, that’s OK. I don’t much like it, either
May 25th, 2009 at 11:53 pm (#)
Good discussion, guys. Thanks.
Eric